Restrictions, penalties are last resort: RBI governor Sanjay Malhotra

RBI Governor Sanjay Malhotra said penalties and restrictions are a last resort, stressing collaboration with banks to curb digital fraud and strengthen customer protection

The relation between a regulator and its regulated entities is collaborative and not adversarial with the common objective of maintaining the stability and credibility of the financial system. However, the action on regulated entities like penalties and business restrictions are the last resort, Reserve Bank of India (RBI)’s governor Sanjay Malhotra said on Friday.

 

At the same time, the governor said that regulated entities need to better understand regulatory expectations and requirements, particularly in the areas where models, partners, data, and digital delivery create new forms of risk.

 

“They need to imbibe the essence of regulation and follow the spirit of it and not merely follow a tick-box based compliance culture. Our endeavour, rather, should be to develop common understanding which can reduce frictions and improve outcomes,” Malhotra said in a speech at the Third Annual Global Conference of the College of Supervisors in the city. 

 

Commenting on the use of technology for the benefit of customers, Malhotra said the aim should be to ensure that digitalisation and innovations are aligned with fair outcomes for consumers. He focussed on the need for guardrails to protect against opaque pricing and inappropriate recovery practices.

 

“For all of us, protecting customers’ interest is not just a priority – it has to become the cornerstone of a sustainable and resilient financial system. Digital channels facilitate our efforts by improving inclusion and convenience. But, without guardrails, they can also facilitate opaque pricing, weak disclosures and inappropriate recovery practices,” he said. He observed that a key element of customer centricity should be to protect them from the menace of rising digital frauds.

 

“While banks and other regulated entities individually should continue to improve their tools, techniques and processes in preventing and tackling digital frauds, this is an area where we need to collaborate with each other to build analytics and tools to detect mule accounts and suspicious transactions timely and pre-emptively,” Malhotra said.

 

He said the central bank’s endeavour should be to develop a common understanding, which can reduce frictions and improve outcomes.

 

“Regulated entities need to better understand regulatory expectations and requirements, particularly in the areas where models, partners, data, and digital delivery create new forms of risk,” he said.

 

He clarified that supervisory and enforcement actions of the regulator must be seen as part of a continuum of supervisory tools, not as a standalone response.

 

In this context he said, “Enforcement, restrictions and penalties are measures of last resort. Our endeavour is to have a robust financial ecosystem where supervision encourages self-correction and enforcement acts only as backstop,” adding that regulation works best when banks and other regulated entities view supervisors not as fault-finding inspectors, but as partners in resilience.

 

“Regulation works best when banks and other regulated entities view supervisors not as fault-finding inspectors, but as partners in resilience.”

 

He said supervision should not only enforce existing regulations, but also help refine them by flagging regulatory gaps and inconsistencies observed during supervisory engagements.  In this context, he highlighted recent amendments to the co-lending directions and lending against gold & silver jewellery where feedback from all the stakeholders helped the regulator to refine regulations.