MSME body pitches unified regulator; seeks banking oversight shift

Ahead of the Union Budget 2026, the Federation of Indian Micro and Small & Medium Enterprises (Fisme) has written to the Prime Minister’s Office (PMO), proposing the creation of a unified financial sector regulator covering banking, insurance, and fintech. Fisme’s argument is that fragmented oversight and weak grievance redressal mechanisms are constraining credit access for micro, small, and medium enterprises (MSMEs).

 

In a reform blueprint titled “Next-Generation Economic Reforms for MSME-Led Industrial Growth in India”, the industry body has recommended carving out the banking regulation function from the Reserve Bank of India (RBI) and merging it with the Insurance Regulatory and Development Authority of India (Irdai) to form a single regulator for the financial system.

 

According to Fisme, the Indian banking system operates under conditions of monopolistic competition, with high switching costs giving banks significant market power over borrowers, particularly MSMEs. Despite priority sector lending norms, institutional credit to MSMEs as a share of overall bank lending has steadily declined over the years, with barely 15 per cent of MSMEs accessing formal finance.

 

The paper argues that RBI’s multiple responsibilities such as monetary policy, government debt management, and exchange rate management leave the central bank with limited institutional capacity to enforce customer protection and competition in banking. “Finance to MSMEs as a percentage of total bank lending has been coming down steadily during the last decades. In spite of priority sector lending policy, barely 15 per cent of MSMEs access institutional finance,” it notes. According to the paper, RBI's earlier customer protection initiatives such as the Banking Codes and Standards Board of India were eventually diluted. It also points out that while the Code of Bank's Commitment to micro and small enterprises had earlier barred banks from levying prepayment charges, subsequent RBI circulars permitted such charges if explicitly provided for in loan agreements.

 

Fisme has also flagged gaps in the existing grievance redressal architecture. Credit-related complaints from MSMEs fall outside the ambit of the RBI’s Ombudsman scheme, leaving borrowers with little recourse in cases of arbitrary interpretation of the central bank’s circulars, misuse of credit bureau reporting, sudden freezing of accounts, or imposition of prepayment and non-compliance charges.

 

Under its proposal, the unified regulator would be tasked with ensuring competition, customer orientation and innovation across banking, insurance, and fintech — sectors that the paper notes are increasingly converging, particularly with the use of artificial intelligence (AI). The regulator would also oversee a dedicated, information technology (IT)-based grievance redressal mechanism for commercial borrowers, developed with the participation of the Indian Banks’ Association and MSME bodies.

 

Fisme has further recommended strengthening the Ombudsman framework by mandating speaking orders, allowing appeals more liberally, and placing annual reports on complaint disposal and follow-up action before the Parliamentary Standing Committee on Finance.

 

The reforms, the body argues, are essential to address structural weaknesses in India’s financial system that disproportionately affect MSMEs, which account for nearly 99 per cent of enterprises but remain highly informal and vulnerable to regulatory and credit shocks.