Trigger happy regulator? RBI Dy Guv says action to protect customers

The Reserve Bank of India (RBI) has responded to criticism regarding its recent stringent actions against some banks and shadow banks, stating that these measures were intended to protect depositors and customers. Only a handful of entities have faced business restrictions, the regulator clarified.

“I would like to address the perception that supervisors are overly eager to impose business restrictions, sometimes being portrayed as ‘trigger-happy’,” said RBI Deputy Governor Swaminathan J at an event organised by CNBC-TV18 on August 30. The RBI has uploaded the speech on its website on Monday.

In recent years, the regulator has imposed business restrictions and barred entities from onboarding new customers for violating norms and causing customer inconvenience. Some of these entities include HDFC Bank, Paytm Payments Bank, IIFL Finance, and JM Financial, among others.

 

“We are sometimes asked by the media “who is next”? Implying that supervisory actions are routine in nature,” Swaminathan said.

He said there were more than 150 banks, over 9,000 non-banking financial companies as well as about 1,500 urban cooperative banks (UCBs) and other entities that the RBI supervises. “Stringent actions have been taken only in a handful of cases. The most extreme outliers in each category have been subjected to such punitive actions to have a demonstrative effect on the rest of the industry,” he added.

He said the decision to impose business restrictions was never taken lightly. Strong supervisory actions are implemented only after careful onsite examinations, offsite data analysis, and extensive engagement with the regulated entities concerned, often over several months.

“Our primary goal is to ensure the stability and integrity of the financial system, not to hinder business operations,” he said.

Citing the example of fintechs, Swaminathan said many such platforms operate on a business model that involves extending small-value loans to customers, often with poor credit profiles. Unfortunately, this is frequently followed by aggressive recovery tactics, such as invading customers’ privacy by accessing their contacts and personal data.

“These practices can seriously damage the reputation of the regulated lenders associated with these platforms,” he said.

He also discussed the recent norms on peer-to-peer (P2P) lending platforms, noting that supervisory findings over the past year revealed that some of these platforms adopted practices that violated both the letter and spirit of the regulations.

“It is being presented in some quarters as if these ‘new’ regulations will ‘kill’ this industry. On the contrary, the differentiated licensing and light-touch regulations granted to such entities are intended to help them set up unique platforms, not to mimic banks or NBFCs that are more robustly capitalised and stringently regulated,” he explained.

Swaminathan also addressed concerns that the regulator’s actions may curb innovation or intrude excessively into business operations, arguing that regulators must be more supportive of risk-taking.

He said while businesses may be inclined to take greater risks in pursuit of profits and investor returns, regulators have the responsibility to protect depositor and customer interests and preserve financial stability.

“The role of the regulator is to establish guardrails or a balanced framework that encourages innovation while ensuring that risks are managed prudently,” he said.

The deputy governor emphasised that the regulator’s job is not only to simplify, harmonise, and modernise but also to strengthen the regulatory and supervisory frameworks.

“The recent drafts on expected credit loss, project finance, and liquidity coverage ratio exemplify this approach, aiming to reflect the needs of the industry while seeking to enhance financial strength and stability,” he concluded.