The Reserve Bank of India (RBI) has unveiled a landmark regulatory framework titled Reserve Bank of India (Commercial Banks – Undertaking of Financial Services) Directions, 2025. These RBI directions, effective from November 28, 2025, redefine how commercial banks in India can engage in financial services, ensuring robust governance, risk management, and customer protection.
Why This Matters?
In today’s dynamic financial ecosystem, banks are no longer confined to traditional lending and deposit-taking. They actively participate in insurance, mutual funds, pension fund management, investment advisory, and even commodity derivatives. However, such diversification brings risks, both operational and prudential. The RBI’s new directions aim to balance innovation with stability, safeguarding the interests of customers and the banking system.
Scope and Applicability
These directions apply to all commercial banks, including:
- Banking companies (except Small Finance Banks, Payment Banks, and Local Area Banks)
- Corresponding new banks
- State Bank of India
The framework is issued under Section 35A of the Banking Regulation Act, 1949, giving RBI the authority to regulate banks in the public interest.
Key Objectives of the Directions
- Strengthen governance through Board-approved policies.
- Mitigate concentration risk in investments.
- Ensure transparency in dealings with subsidiaries and third-party providers.
- Align Indian banking practices with global standards, especially for IFSC operations.
Major Highlights of RBI Directions, 2025
1. Role of the Board
The Board of Directors is at the heart of these directions. It must:
- Approve policies for insurance distribution, corporate agency business, and risk control measures.
- Ensure arm’s length relationships with subsidiaries.
- Review performance of subsidiaries periodically.
- Approve limits for underwriting commitments in factoring business.
- Oversee risk management frameworks for IFSC branches, including exposure limits and margin requirements.
2. Prudential Norms for Investments
To prevent overexposure and systemic risk:
- Single Entity Limit: Equity investment in a subsidiary or financial services company cannot exceed 10% of the bank’s paid-up capital and reserves.
- Aggregate Limit: Total equity investments in all subsidiaries and other entities (financial and non-financial) cannot exceed 20% of paid-up capital and reserves.
- Prior Approval: Banks must seek RBI approval for investments beyond prescribed limits or for setting up new subsidiaries.
3. Alternative Investment Funds (AIFs)
The RBI has introduced stringent norms for AIF investments:
- Banks cannot contribute more than 10% of the corpus of an AIF scheme.
- Aggregate contribution by all regulated entities in an AIF scheme is capped at 20%.
- If an AIF invests in a debtor company of the bank, 100% provisioning is required for the bank’s proportionate exposure.
4. Permitted Financial Services
The directions cover a wide spectrum of activities:
- Equipment Leasing & Hire Purchase
- Factoring Services
- Primary Dealership Business
- Underwriting Activities
- Mutual Fund Business
- Insurance Business
- Pension Fund Management
- Investment Advisory & Portfolio Management
- Agency and Referral Services
- Broking Services for Commodity Derivatives
- Membership of SEBI-approved Stock Exchanges
- Participation in India International Bullion Exchange (IIBX)
Each service comes with specific conditions, such as minimum net worth requirements, risk management frameworks, and compliance with SEBI, IRDAI, and PFRDA norms.
5. Operations in IFSCs and Overseas
Indian banks operating in GIFT City IFSC or foreign jurisdictions can deal in structured financial derivative products not available in the domestic market, subject to:
- Prior Board approval.
- Adequate risk management capability.
- Compliance with both host and home regulations.
- No dealings in products linked to the Indian Rupee unless permitted by RBI.
Effective Date
Most provisions are effective immediately. However, norms related to Alternative Investment Funds (AIFs) will come into force from January 1, 2026, or earlier as per a bank’s internal policy.
Compliance and Application Process
Banks seeking to undertake new financial services or make investments requiring RBI approval must apply through the PRAVAAH Portal.
Impact on Banking and Customers
These directions will:
- Enhance financial stability by reducing concentration risk.
- Protect customers through grievance redressal and suitability norms.
- Promote transparency in banks’ dealings with subsidiaries and third-party providers.
- Enable global competitiveness for Indian banks operating in IFSCs.
Conclusion
The RBI Directions, 2025 represent a paradigm shift in how commercial banks operate in India. By setting clear norms for governance, investments, and risk management, these guidelines aim to create a safer, transparent, and globally aligned banking ecosystem.