RBI News
RBI Tightens AePS Operator Due Diligence; Bans Loan Prepayment Fines for Small Borrowers
The Reserve Bank of India (RBI) has issued final guidelines for onboarding Aadhaar Enabled Payment System (AePS) touchpoint operators, mandating strict due diligence by acquiring banks from January 1, 2026. Operators (ATOs) must undergo Know Your Customer (KYC) checks before activation. ATOs inactive for three months will require KYC revalidation before resuming services. If ATOs were already verified as Business Correspondents, their due diligence may be adopted.
Acquiring banks must continuously monitor ATO transactions and apply operational risk-based parameters. These guidelines aim to reduce fraud by mandating controls over location, volume, and transaction types, and ensuring technological integrations like APIs are solely used for AePS functions.
Separately, RBI has prohibited prepayment penalties on floating-rate personal and small business loans, including those offered by NBFCs and cooperative banks. This directive takes effect from January 1, 2026, and will improve borrower mobility. Additionally, the government has asked banks to close inactive Jan-Dhan accounts to curb their misuse in frauds.
RBI Bars Prepayment Charges on Floating Rate Loans for Small Borrowers
In a borrower-friendly move, the Reserve Bank of India (RBI) has prohibited prepayment penalties on floating-rate personal loans and business loans offered to individuals, micro, and small enterprises. The new rule, part of the RBI’s “Pre-payment Charges on Loans Directions, 2025,” will apply to all loans sanctioned or renewed on or after January 1, 2026. The directive includes loans from commercial banks, cooperative banks, NBFCs, and all-India financial institutions.
For small finance and regional rural banks, the waiver is applicable to loans up to Rs. 50 lakh. Notably, even loans that begin as fixed-rate but later convert to floating-rate are eligible, if prepaid during the floating phase. In cases where prepayment charges are permitted—such as for fixed-rate loans—they must be transparently disclosed in advance, proportionate to the prepaid amount, and not applied retrospectively.
The RBI’s move is intended to encourage borrower mobility, enhance competition among lenders, and simplify loan repayment for small borrowers.
Centre Asks Banks to Shut Inactive Jan-Dhan Accounts Amid Fraud Concerns
The government has directed public sector banks to close dormant accounts under the Pradhan Mantri Jan-Dhan Yojana (PMJDY), following growing concerns over their misuse as mule accounts in fraudulent transactions. Sources familiar with the matter said that unused accounts are at risk of being exploited for routing or laundering illicit funds.
While banks are being urged to shut these accounts, they are also initiating re-KYC procedures to give account holders a chance to reactivate them, if needed. The move comes in the wake of alarming data from the Reserve Bank of India (RBI), which recorded 13,516 cases of digital payment fraud in FY25— the highest across the banking sector.
Jan-Dhan accounts were initially introduced to promote financial inclusion by enabling access to banking services for underserved populations. However, inactivity in some of these accounts has now prompted regulatory attention, as authorities aim to plug loopholes and prevent their abuse in cyber and financial frauds.
RBI Imposes Penalties on HDFC Bank and Shriram Finance for Regulatory Lapses
The Reserve Bank of India (RBI) has levied monetary penalties on HDFC Bank and Shriram Finance for breaching regulatory norms. HDFC Bank was fined Rs. 4.88 lakh for violating foreign investment regulations while sanctioning a term loan to a client. The RBI noted that it had issued a show-cause notice to the bank, followed by a written response and oral submissions. Upon evaluating the submissions, the RBI concluded that the contraventions were substantiated and merited a penalty.
Separately, Shriram Finance Limited faced a penalty of Rs. 2.70 lakh for non-compliance with provisions under the Reserve Bank of India (Digital Lending) Directions, 2025. The penalty followed a statutory inspection of the company’s financials as of March 31, 2024. Based on supervisory findings, the company was issued a notice and was asked to explain the reasons for non-compliance. After considering all responses and hearing submissions, the RBI established the violation and imposed the monetary penalty accordingly.
Bank Deposits Surge, Outpacing Credit Growth: RBI Data
According to data released by the Reserve Bank of India (RBI), banks witnessed a significant surge in deposits, with growth far exceeding credit expansion in the fortnight ending June 27, 2025. Deposits of all scheduled commercial banks rose by Rs. 3.54 trillion, while credit offtake increased by only Rs. 1.69 trillion during the same period.
This marks a continuation of the trend observed since May, where deposit growth has consistently outpaced loan disbursals. As of May 30, deposits grew at 10.1% year-on-year, compared to credit growth of 9.8%. Banking experts attribute the rise in deposits to investor caution, noting that traditional investment avenues like equities and gold have become relatively expensive due to global uncertainties, including ongoing trade disruptions and geopolitical tensions such as the Israel-Iran conflict.
Analysts suggest that the safe haven appeal of bank deposits is gaining traction once again, especially amid falling interest rates and volatile alternative markets, reinforcing the banking system’s role as a stable financial intermediary.
RBI Announces Record Rs. 2.5 Lakh Crore VRRR Auction Amid Liquidity Surge
The Reserve Bank of India (RBI) will conduct a record Rs. 2.5 lakh crore Variable Rate Reverse Repo (VRRR) auction to manage a growing liquidity surplus in the banking system, estimated to exceed Rs. 9 lakh crore. Despite draining Rs. 3 lakh crore through earlier VRRR operations, the surplus remains elevated, prompting the central bank to intensify its absorption efforts. The surplus stems from strong government spending, large fiscal outflows, and RBI’s forex interventions, which have injected additional rupee liquidity.
Simultaneously, deposit growth has consistently outpaced credit offtake, leaving banks with idle funds. Regulatory adjustments to the liquidity coverage ratio have further expanded banks’ lendable resources. The VRRR, which allows banks to competitively bid, is preferred over fixed-rate tools as it better aligns overnight market rates with the RBI’s policy stance and ensures rates remain within the liquidity adjustment facility (LAF) corridor. The central bank’s proactive stance mirrors similar liquidity management actions seen globally post the 2008 financial crisis.
RBI Proposes Draft Guidelines for Novation of OTC Derivative Contracts
The Reserve Bank of India (RBI) has issued draft guidelines for the novation of over-the-counter (OTC) derivative contracts, aiming to rationalize the regulatory framework. Novation involves substituting one market maker with another in an existing OTC derivative contract, forming a new agreement between the remaining party and the new counterparty. According to the “Draft RBI (Novation of OTC Derivative Contracts) Directions, 2025,” such transactions must be executed at prevailing market rates and only with prior consent from the continuing party.
The guidelines propose that associations like FIMMDA and FEDAI, in consultation with market participants, develop standard agreements for novation based on global best practices. Alternatively, a standard master agreement may be used. The draft seeks to replace the RBI’s existing 2013 circular, taking into account evolving regulatory frameworks and market feedback. This marks a step toward enhancing transparency and efficiency in India’s derivative markets while ensuring regulatory consistency in contract transfer processes. Public comments are expected before finalization.
RBI Suggests Unique Borrower ID, Eyes Digital Lending Reforms
To minimize credit score errors and improve access to finance, RBI Deputy Governor M Rajeshwar Rao proposed the introduction of a unique, verifiable borrower identifier at the TransUnion CIBIL 25th anniversary event. He emphasized that such a secure ID could reduce duplication and misreporting in credit bureaus, enhancing lending accuracy and transparency. Rao also highlighted RBI’s ongoing push for a Unified Lending Interface (ULI), a digital platform enabling multiple lenders to access verified borrower data, similar to UPI in payments.
In a notable pilot, the RBI is exploring programmable digital rupees for lending to tenant farmers under the Kisan Credit Card scheme, which could later benefit street vendors and artisans by creating digital credit histories. He also discussed initiatives like the Data Quality Index, redressal frameworks, and internal ombudsmen for improved transparency. Stressing responsible innovation, Rao highlighted AI, machine learning, and the upcoming Grameen Credit Score as vital for inclusive credit access, while cautioning about data accuracy, security, and model risks.
Finance Ministry Orders Third-Party Evaluation of PSB Boards
Amid concerns over governance lapses at certain public sector banks (PSBs), the Ministry of Finance has directed all PSBs to conduct third-party evaluations of their board performance. The initiative aims to assess board effectiveness, oversight, committee functionality, ethics, compliance, risk management, and alignment with institutional strategy. The directive follows isolated governance failures that raised red flags about the scrutiny exercised by bank boards.
State Bank of India, Bank of Baroda, Punjab National Bank, Union Bank of India, and Central Bank of India have already commenced the evaluation process. Others, including UCO Bank, Indian Overseas Bank, and Bank of Maharashtra, are expected to follow suit. Top consultancy firms like Deloitte and KPMG are leading these assessments. According to former Punjab & Sind Bank MD S. Krishnan, this is a positive move aligned with global standards. However, he stressed that evaluations must maintain confidentiality, given the sensitive and systemic nature of the banking sector.
