Financial RegTech Newsletter: September 2025
Introduction
India’s digital lending ecosystem has witnessed exponential growth which is driven by fast-paced technological advancements, increased smartphone penetration and the rise of innumerable FinTech platforms. While this evolution has enhanced credit access and financial inclusion, it has also increased concerns around data privacy, mis-selling, extremely high interest rates and aggressive recovery practices, which are often exacerbated by the unregulated involvement of third-party agents. To respond to these challenges and safeguard consumer interests without stifling innovation, the RBI has issued a set of guidelines for regulated entities (REs) on digital lending. These measures will ensure orderly growth, financial stability and long-term credibility of the digital lending ecosystem.
India’s digital lending surge: A glimpse into the future
The growth of digital lending in India has been nothing short of phenomenal. Between 2017 and 2022, the market expanded at a staggering compound annual growth rate (CAGR) of 132%, driven by internet penetration, FinTech innovation and evolving consumer preferences. This fast-paced digital transformation is expected to continue, with projections estimating the market size to reach USD 515 billion by 2030. As digital lending becomes a core pillar of financial inclusion and credit access, this momentum underscores the need for robust governance, transparency, and customer protection frameworks – areas where the RBI is increasingly focused through progressive regulatory interventions
The detailed notification can be accessed here.
Timelines and applicability
The RBI has issued consolidated Digital Lending Directions to streamline and strengthen the digital credit delivery regulatory framework. All these directions incorporate previous guidelines while introducing new measures which are aimed at improving oversight, transparency and consumer protection in India’s growing digital lending ecosystem.
Effective date
The directions come into force immediately, except for the following provisions:
- Directions which are related to the partnership between the lending service providers (LSPs) and multiple REs should be effective from 1 November 2025.
- Directions which are related to the creation of digital lending apps directory should be effective from 15 June 2025.
The directions are mandatory for all digital lending activities undertaken by the following REs:
- commercial banks
- co-operative banks, including primary (urban) co-operative banks, state cooperative banks and central co-operative banks
- non-banking financial companies (NBFCs), including housing finance companies (HFCs)
- All India Financial Institutions (AIFIs)
- General requirements for RE–LSP arrangements
- Conduct and customer protection requirements
- Reporting of credit information and DLAs
- Loss sharing arrangement in case of default
- Improving borrowers’ insights: What banks must do next
General requirements for RE–LSP arrangements
To ensure responsible digital lending practices, the RBI mandates REs to adhere the following principles when partnering with LSPs:
- Contractual clarity: All digital lending arrangements should be governed by a contractual agreement that defines the roles, rights and obligations of both the REs and LSPs.
- Ongoing oversight: REs should periodically review the LSP’s adherence to contractual obligations.
- Responsible recovery practices: REs must provide proper guidance and training where LSPs act as recovery agents.
Conduct and customer protection requirements
- REs are required to conduct a thorough background verification of the borrower’s creditworthiness prior to loan disbursal by collecting key economic profile details including age, occupation, income grade and maintaining this information for audit purposes. Additionally, REs must ensure that credit limits are not increased automatically; any enhancements must be based on an explicit request from the borrower which are duly evaluated and properly recorded in order to uphold responsible lending practices.
- REs must provide clear and timely disclosures to borrowers. REs must maintain an updated public website with product details, engaged LSPs/ digital lending apps (DLAs), grievance redressal contacts and RBI complaint links. Borrowers must also be informed in advance via email or SMS when a recovery agent is assigned or changed.
- Loan disbursals by REs should be made directly to the borrower’s bank accounts, with exceptions made only for regulatory mandates, co-lending or specified use cases. All repayments must be processed directly by the borrower to the RE’s account, with no third party or LSP involvement in fund flow or collection. Fees payable to LSPs must be borne by the RE and should not be passed on to the borrowers. In delinquency cases, cash recovery should be allowed but must be reflected in the borrower’s account the same day, and LSPs should not collect any charges from the borrowers.
- Borrowers of digital loans are now entitled to a minimum one-day coolingoff period, during which they can exit the loan by paying the principal and proportional interest without any penalties. Lenders may charge a reasonable disclosed one-time processing fee if the loan is exited within this period. Beyond the cooling-off period, pre-payment terms will follow existing RBI guidelines.
Reporting of credit information and DLAs
- REs should report all the loans which are disbursed through their DLAs, including those of their service providers, to credit information companies (CICs), regardless of loan type or duration. This ensures comprehensive credit reporting for all digital lending activities.
- REs are also required to register all DLAs they use on the RBI’s Centralised Information Management System (CIMS) portal and update this information regularly. The chief compliance officer must certify that the data is accurate and that the DLAs comply with RBI regulations on privacy, grievance redressal and customer disclosures.
- The information submitted will be published by the RBI and REs are responsible for addressing all customer complaints related to DLAs. Reporting on all DLAs must be completed by 15 June 2025, and inclusion on the portal does not imply RBI endorsement or authorisation of the DLAs.
Loss sharing arrangement in case of default
- REs can enter into loss-sharing arrangements default loan guarantee (DLG) only with LSPs or other REs incorporated as companies. They must have a Board-approved policy detailing eligibility, coverage, monitoring and fees related to DLGs. Importantly, DLGs cannot replace thorough credit appraisal and underwriting standards.
- DLG agreements must be formal contracts specifying the extent of cover, timelines and disclosure requirements. The DLG cover can be in the form of cash, fixed deposits with liens or bank guarantees. The total DLG cover for any loan portfolio should not exceed 5% of the total disbursed amount and is applicable only to a fixed set of identifiable loans
- Recognition of non-performing assets (NPAs) and provisioning remains the responsibility of the RE, regardless of DLG cover. Invoked DLG amounts do not reduce borrower liabilities, and any recoveries post-invocation can be shared with the DLG provider. DLG amounts cannot be reinstated if invoked.
- REs must invoke DLG within 120 days of overdue payments, and the DLG agreement should cover the longest loan tenor. They must disclose monthly details of portfolios covered under DLG on their websites. Certain credit guarantee schemes and multilateral institution guarantees are excluded from the DLG definition.
Improving borrowers’ insights: What banks must do next
The ultimate objective for banks is to improve credit information assessment and eventually take better lending decisions. They can move from static credit models to dynamic, inclusive and predictive ones
- REs need to focus on continuous improvement of credit data quality. Basis the Data Quality Index (DQI) received from CICs, there should be an exception report along with the reasons, including comparison with previous submitted reports and identifying live and closed accounts reported in previous cycle and current cycle. Data should be maintained to slice and visualise by specific dimensions, source systems, product, schemes, cycles etc
- REs must standardise and automate bureau report generation through risk data mart, to mitigate some of the challenges such as manual validation and incomplete datasets, and have real-time reconciliation to establish completeness of data getting submitted to bureaus. There should be functionality to tactically fix any exception (through correction layer) and ensure accurate resubmission to bureau.
- REs should rely more on dynamic credit models with regular audits and real-time reconciliation of loan/credit data with bureaus and/or agencies. Based on such data, credit limits should also be adjusted regularly.
- REs can leverage alternate data sources or open banking APIs to analyse real-time transactions, cash flow patterns (personal and business) of borrowers and advanced risk models to detect early warning signals (e.g. repayment patterns, bills overdue, rising debts).
- Banks must collect only essential borrower information – with clear consent flows. REs should be responsible for securely storing borrower data within India and ensuring clear policies on data retention, usage and breach management are publicly available. Both REs and their service providers must comply with RBI-mandated cybersecurity standards.
Regulatory News
Key regulatory updates from RBI’s annual report
The RBI will issue separate regulations for non-deposit-taking NBFCs and those dealing with the public, along with guidelines to prevent mis-selling by REs and third parties. It plans new master directions on KYC and a review of internet and mobile banking rules. RBI will also harmonise income recognition, asset classification and provisioning norms for all entities and review non-fund based contingent facilities like bank guarantees. Finally, it will implement the final phase of Basel III, including updated guidelines on credit and market risks, and enhanced public disclosures on financial health and risk management.1
RBI unveils roadmap to strengthen digital banking and expand CBDC initiatives
The RBI, in its latest annual report, announced a comprehensive review of internet and mobile banking regulations and plans to expand the Unified Lending Interface (ULI) by adding more loan products and lenders, and introducing B2C functionality. The RBI will also enhance the Central Bank Digital Currency (CBDC) pilots with new use cases, including cross-border payments. In parallel, it is developing frameworks for digital operational resilience, ethical AI use and digital forensic readiness, while intensifying efforts to combat cyber risks through initiatives like MuleHunter and sector-wide cyber crisis simulations.2
What is CBDC?
A CBDC is a digital representation of a nation’s official currency, issued and regulated by its central bank. Unlike cryptocurrencies, which are typically decentralised and subject to market volatility, a CBDC maintains a stable value as it is pegged to the sovereign currency. It combines the convenience and efficiency of digital payments with the trust and backing of a central monetary authority.
The detailed notification can be accessed here.
How is RBI taking initiatives towards CBDC?
The RBI is actively advancing its CBDC initiatives through a phased approach that includes wholesale and retail pilots launched in late 2022. To boost adoption, the RBI has expanded access from traditional banks to non-bank FinTech players like PhonePe, Paytm and Cred, and introduced key features such as offline transaction capability and programmability – enabling targeted usage like subsidies and welfare schemes. As of March 2025, the retail CBDC had over 6 million users, 17 participating banks and INR 1,016 crore in circulation. The RBI is also exploring cross-border payment applications and updating regulatory frameworks to support a broader rollout of the digital rupee, positioning it as a secure, inclusive and scalable digital payment solution.
The detailed notification can be accessed here.
What is MuleHunter?
The RBI has introduced an AI/ML-powered system named MuleHunter.ai to combat the growing problem of mule accounts (bank accounts exploited for laundering funds linked to cybercrime). This tool, created by the Reserve Bank Innovation Hub, leverages banking data to detect fraud patterns more efficiently. The initiative is currently being tested with two public sector banks.
The detailed notification can be accessed here.
RBI launches 2024-25 ‘Survey on Foreign Liabilities and Assets (FLA) of Mutual Funds and their Asset Management Companies (AMCs) in India’
The RBI has initiated the 2024-25 round of its annual survey on ‘Foreign Liabilities and Assets of Mutual Funds and Asset Management Companies’ to collect data as of March 2025. The survey gathers information on external financial assets and liabilities for compiling India’s external sector statistics and making the results publicly available. AMCs are required to submit the FLA return online via the Foreign Liabilities and Assets Information Reporting (FLAIR) system by 15 July 2025. Mutual fund companies must also complete Schedule-4, accessible under the ‘Regulatory reporting’ or ‘Forms’ section on the RBI website, and email it by the same deadline.3
RBI mandates use of PRAVAAH portal for REs to seek regulatory approvals
The RBI launched the Platform for Regulatory Application, Validation and Authorization (PRAVAAH) portal on 28 May 2024, as a centralised, secure online platform for REs and individuals to submit applications for authorisations, licences or approvals. Starting 1 May 2025, it will be mandatory for all REs to use PRAVAAH for submitting such regulatory requests.4
Global Regulatory News
Global banking regulators boost climate risk efforts amid US pushback
Global banking regulators under the Basel Committee have agreed to intensify efforts to combat financial risks from climate change, especially extreme weather. A voluntary disclosure framework will be published to help jurisdictions address these risks. While European regulators push ahead with climate-focused supervision, the US has scaled back such initiatives, with agencies like the Federal Reserve and OCC distancing themselves from earlier climate risk commitments.5
EU to conduct first stress test on non-bank financial institutions amid rising systemic risks
European regulators plan their first stress test targeting non-bank financial institutions like hedge funds, private equity, pension funds and insurers to identify risks in the wider financial system. This follows concerns over the rapid growth and increasing influence of these less REs, which now account for a significant portion of loans in the Eurozone. The test tries to understand how a market crisis could spread beyond banks and amplify financial shocks, building on previous sector-specific stress tests and the Bank of England’s similar exercise last year.6
US Securities and Exchange Commission (SEC) cracks down on ‘AI washing’
The US SEC has intensified its scrutiny of companies making exaggerated claims on their use of artificial intelligence, a practice termed ‘AI washing’. The SEC is prioritising accurate and transparent disclosures, with a newly restructured unit focusing on emerging technologies. Private legal actions are also on the rise, with AI-related securities class action filings doubling in 2024 and projected to increase further.7
On 18 March 2024, the SEC charged two investment advisors with making false and misleading statements regarding their use of AI. As a result of which, both of these firms had to pay civil penalties.
One of these companies claimed to be the ‘first regulated AI financial advisor’ and touted ‘expert AI-driven forecasts’. The SEC found these claims entirely unsubstantiated – they lacked evidence to back them and could not prove that such AI capabilities existed.
The detailed notification can be accessed here.
EBA launches consultation on enhanced Pillar 3 disclosure requirements
The European Banking Authority (EBA) has initiated a public consultation on proposed amendments to the EU Implementing Regulation governing Pillar 3 disclosures under the Capital Requirements Regulation framework. The revisions aim to refine and expand transparency requirements related to environmental, social, and governance (ESG) risks, exposures to equity instruments, and relationships with non-bank financial entities – often referred to as shadow banking. Additionally, the proposal includes alignment with updated EU-wide classification standards for economic activities through revised NACE (Statistical Classification of Economic Activities in the European Community) codes. These changes are designed to improve risk disclosures while ensuring proportionality across institutions.8
RBI’s outlook on financial stability
India’s banking system has shown resilience despite global trade and tariff uncertainties
Due to uncertainties in global trade policies, widening fiscal deficit, financial risks are rising globally. But Indian banks have shown resilience owing to the huge dependency on domestic demands.
Deposits in scheduled commercial banks (SCBs) have expanded at 10.7% YoY during 2024-25 as of June 2025, despite slow-down among private sector and foreign banks deposits growth.
Public sector banks credit growth (12.2%) has surpassed private banks (8.9%) after a decade, but overall SCBs’ credit growth has decelerated in 2024-25 as of March 2025. This is backed by lenders’ wariness, better lending standards with minimising unsecured lending, which in return improves asset quality.
Services and personal loans are top two contributors of overall credit growth among SCBs – with overall personal loans slowing down YoY although other personal loans (apart from housing, education, vehicles, credit cards) have expanded, followed by housing loans. The proportion of agriculture and industrial loans has also shrunk.
SCBs’ asset quality improved significantly with decade low NPAs, primarily driven by write-offs.
SCBs’ gross NPA (GNPA) and net NPA (NNPA) stand at 2.3% and 0.5%, which are the lowest over the past several decades. But these are mainly driven by write-offs, increasing their share to 31.8% of GNPA in FY 2024-25 among private sector and foreign banks. Public sector banks (PSBs)’ write-offs have slightly declined.
The agriculture sector had the highest GNPA and was the largest contributor of total NPAs, whereas the industrial sector showed steady improvements in asset quality across all sub-sectors. The personal loan segment saw stable asset quality across sub-segments.
Large borrowers account for 43.9% of total borrowings, while their share in SCBs’ GNPA fell to 37.5%. Top 100 borrowers, who contributed 15.2% share in total advances, had no NPAs among them as of March 2025.
Capital risk-weighted asset ratio (CRAR) of SCBs rose to a record 17.3% in March 2025, driven by capital growth outpacing risk-weighted asset growth. Profit after tax (PAT) of SCBs rose by 16.9% in FY 2024-25 with PSBs’ PAT surging 31.8% due to stringer operating income. Private banks’ lower profitability (9.2%) was due to high operating expenses. Net interest margin (NIM) declined due to higher cost of funds, resulting in lower ROA and ROE. Liquidity across all bank groups has strengthened with both LCR and NSFR staying well above 100%.9
Household debts stay contained with reduced stress on borrowers, while sub-prime lending needs better surveillance.
Household borrowings in India have been rising steadily, although its proportion to GDP (41.9%) is still lower than other emerging market economies (EMEs). As the household wealth grew in FY 2023-24, per capita borrowing has grown from INR 3.9 lakhs to INR 4.8 lakhs in the last two years as of March 2025, which is led by higher rated borrowers.
Housing loans and non-housing (consumption) retail loans consist of 29% and 54.9% of household debts respectively, as of March 2025. Though the former’s growth has been steady, latter’s growth has outpaced agriculture and housing loans. Housing loans’ growth has been steered by existing borrowers and additional loans, which have been more than a third of housing loans sanctioned in March 2025.
Borrowers with loan to value (LTV) more than 70% have been rising to 22.3% of outstanding housing loans as of March 2025. Although delinquency looks better for this segment, lower rated (sub-prime) borrowers GNPA is still on the higher side with delinquency ratio of 10.1.10
Consumer loans have slowed down due to RBI regulations in Q3 2023-24, but resulted in better asset quality and prime rated borrowers.
Consumer loans have grown at CAGR of 20.4% over the last four years – faster than the overall loan growth (14.6%). The segment has slowed down due to RBI’s regulations in Q3 2023-24, but the asset quality has improved. Delinquencies (except credit cards) declined, SMA-2 upgrades increased, and slippages fell – GNPA stood at 1.4% as of March 2025 with higher prime rated borrowers in public and private sector banks.11
Unsecured retail loans and bank credits to the MSME sector
Although their growth has slowed, unsecured retail loans still constitute 25% of retail loans and 8.3% of total bank advances.
Asset quality of such loans has deteriorated with 1.8% GNPA – which is higher than the overall GNPA (1.2%) – and high, fresh slippages, especially in private sector banks.
Despite slowdown in banks’ lending, the MSME non-food credit has been exceptional – compared to other sectors – with consistent credit growth in FY 2024-25. GNPA in MSME loans declined from 4.5% to 3.6% in the last one year, as of March 2025, with a notable drop in SMA-2 ratio. Sub-prime borrowers in the MSME portfolio have declined from 33.5% to 23.3% over the last financial year.
Government schemes (CGFMU and ECLGS) enhanced credit flow to susceptible MSMEs, guaranteeing around INR 6.28 lakh crore. NPA ratios under these schemes remain low, despite having riskier borrowers.
The microfinance sector is under stress due to stringent underwriting standards by the lenders. As a result, credit declined by 13.9% in FY 2024-25, with active borrowers down by 40 lakhs. Bank credit fell by 13.8% and loans with 31-180 days past due increased from 4.3% to 6.2% in the last two quarters as of March 2025.12
Despite the pressures, NBFCs are positioned to support growth, though vulnerable to rising household stress and funding costs.
NBFCs, including housing finance companies and FinTechs, dominate smallticket personal loans (below INR 50,000) with high borrower indebtedness and overdue. Lending to the microfinance sector from NBFCs contracted by 14.5% in FY 2024-25, and stressed assets’ proportion rose from 3.9% to 5.9%.
Slippages and write-offs are increasing, especially among upper-layer NBFCs, with some outlier firms showing high growth alongside high write-offs. The non-banking stability indicator (NBSI) has slightly deteriorated.
Bank financing to NBFCs has declined, raising their cost of funds, though many NBFCs are tapping foreign currency borrowings – most of which are hedged to diversify.13
Conclusion
India’s economy is expected to maintain steady and strong growth supported by robust domestic consumptions, public infrastructure spending – with global trade recovery, it can perform even better. Stress testing by the RBI suggests that under baseline scenarios, banks will remain resilient even in the face of moderate macro shocks. Capital positions are strong and adequate for future growth and buffers against stress.
Credit growth remains strong, led by retail, MSME, infrastructure and services segments, though caution exists around unsecured lending and loans to subprime borrowers. NBFCs continue to play a critical role in credit intermediation, especially for undeserved sectors. Housing finance companies are seeing stable growth, but exposure to commercial real estate remains a concern. NPA numbers look good on record due to better provisioning and write-offs – however, credit appraisal and recoveries still need attention. There seems to be potential stress in MSME and small-ticket housing loans if interest rates remain high.
Recent US tariff rates on Indian exports could result in revenue declines among labour-intensive sectors (textiles, gems, chemicals, metals, food, automobiles, leather goods). As the export revenue falls, the ability to service bank loans may deteriorate and the NPA risk for financial institutions will increase where the credit concentration of these sectors is high. If tariffs are sustained or broadened, it can lead to higher trade deficit and worsening impacts on financial institutions. Despite these, the RBI projects steady GDP growth at 6.5% for FY 2025-26 without any severe crisis, as exports to US constitute a mere portion of India’s GDP. Furthermore, it may deploy measures to support liquidity and credit flows. On the other hand, this situation could encourage India to diversify trade partners and invest more in domestic production.
Other crucial risk factors to India’s financial stability at present are mainly, threat to cybersecurity due to rise in digital frauds, surge in unsecured lending and MSME stress in high interest rate environment.
Regulatory tightening is helping mitigate over-leveraging in high-risk segments. This is necessary for financial institutions to have improved asset qualities, but it can lead to moderate credit growth in the near future due to risk aversion.
AI/ML disruption in India’s financial system and banks is expected to have a transformative impact on risk management and credit assessment, along with improved customer experience and operational efficiency (KYC, compliance, documentation). It also raises concerns about cybersecurity vulnerabilities, upskilling and regulatory challenges. If adopted with thoughtful regulation and continuous reskilling of the workforce, it would maintain stability with overall financial inclusions and position India as one of the FinTech leaders. But if adoption is rushed, it could lead to unexpected financial contagion. The RBI and other central banks have also highlighted concentration risks, as reliance on a few technology providers could be dangerous and put them in vulnerable positions, if their systems fail or are disrupted.
Acknowledgements: This newsletter has been researched and authored by Anurag Gupta, Mamta Kumawat, Gourab Mazumder, Smruti Bal and Samrat Biswas.
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