2025 outlook: RBI's regulatory focus on innovation, stability, and fairness

RBI's focus on customer, compliance and collaboration will continue in 2025. It will have new initiatives balancing innovation and prudence

As we welcome 2025, it is time to review the year gone by and consider what new regulations the New Year would bring. Let me start by welcoming Sanjay Malhotra as the new governor of the Reserve Bank of India (RBI) and thanking Shaktikanta Das, his predecessor, for his contributions.

 

In 2024, the RBI adopted a 3Cs approach: Customer, compliance and collaboration. In 2025, the focus would surely remain on all these as well as to roll out several initiatives to find the balance between innovation and prudence.

 

I expect RBI to finalise a regulatory framework on project finance and refine guidelines on liquidity coverage ratio. It could harmonise regulations on interest rates on advances across regulated entities (REs), and work on provisioning norms on the introduction of expected credit loss framework. The RBI is reviewing market feedback on its draft circular on forms of business and prudential regulation for investments; and we could see the final circular in early 2025. It is concerned about connected lending and would look at a unified regulatory framework covering all REs. A regulatory framework for web aggregation of loan products and guidelines on valuation of properties based on international best practices is also on the cards. We have seen remarkable progress in the consultative process in designing regulations since the RBI set-up the Regulatory Review Authority 2.0. What could be cherry on top of this is a bit more coordination among regulators.

 

On the supervisory front, transformative governance and customer fairness may continue to be the focus. New areas like assessment of model risk and data governance frameworks may also gain traction. The RBI would look to enhance supervisory capabilities by deploying supervisory technology tools that use artificial intelligence (AI) and machine learning. Keenly watched will be initiatives on integration of offsite analytics with onsite supervision and validation of supervisory data with the Ministry of Corporate Affairs databases. Supervision could also focus on the implementation of the much awaited rules of the Digital Personal Data Protection Act.

 

Coming to the possibilities in the New Year, what I believe is that the paradigm to deliver on the RBI’s mandate to ensure system stability and customer well-being has changed with the advent of new entities and technologies, and hybrid unconventional products. The regulator has taken notice of the growing digitisation of financial services and it would bring guardrails for this swift-changing landscape. The challenge would be to identify risks early and take mitigating steps.

 

The RBI may come out with a draft paper on quantification of climate-related risks. It may also bring out a discussion paper on conduct risk, similar to that of the United Kingdom's Senior Managers Certification Regime. Where I would personally like to see a more active approach is regulation of technology, especially the use of AI. Technology has become pervasive in finance: Energy seems to be focused on becoming the next unicorn in fintech but governance seems to be off focus. This implies that conventional regulatory procedures may need a revisit. I believe that we would see a lot of action from the RBI in 2025 to ensure proper conduct from the entities claiming to be flag bearers of financial technology.

 

We hope RBI would continue to engage with key stakeholders in policymaking. In the words of Governor Malhotra: “Knowledge and expertise are not the monopoly of any one institution and consultation will remain a key pillar of our policymaking process.”

 

I am positive that the RBI under the new governor would effectively manage regulations, keeping in mind the need for rebalancing the objectives of growth and stability.

 

Best wishes for the New Year. 

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The writer is partner-Duvvuru & Reddy LLP; and member-advisory group to the Regulatory Review Authority 2.0