RBI 2026 reforms: ECB revamp, fraud cap, loan boosts

Repo rate held at 5.25% as RBI rolls out reforms

The Reserve Bank of India (RBI) kept the policy repo rate unchanged at 5.25% after the Monetary Policy Committee (MPC) meeting held between February 4 and 6. Alongside the rate decision, RBI Governor Sanjay Malhotra announced a wide set of regulatory and supervisory measures. The stated focus areas include customer protection, safer digital payments, curbs on mis-selling, and lower compliance burdens for select regulated entities. The package also includes steps linked to credit flow and market functioning, covering MSME lending, capital market-related lending norms, and foreign investment routes. In parallel, RBI proposed changes that affect banks’ capital framework and risk weights for different loan categories. The announcements collectively signal a regulatory push on both consumer safeguards and ease of doing business.

A liberalised External Commercial Borrowing (ECB) framework

One of the major changes is a Revised ECB Framework that liberalises the ECB regime across eligibility, maturity, end-use flexibility, operational aspects, and reporting and compliance. The framework simplifies eligibility norms and introduces a standardised minimum average maturity period (MAMP) structure. It also eases end-use provisions and enhances operational flexibility, including the ability to set interest rates consistent with market conditions. At the same time, RBI has sought to strengthen reporting and compliance requirements.

A key transition point is that ECBs availed prior to the issuance of the Revised ECB framework will continue to be governed by the earlier regime, except for reporting requirements. This avoids disruption for existing borrowers while moving the system to the new reporting standards.

ECB eligibility expanded, including LLPs

Under the revised rules, any person resident in India other than an individual that is incorporated, established, or registered under a Central or State Act and permitted under applicable law may raise ECB. This explicitly expands the potential borrower base. A notable inclusion is that Limited Liability Partnerships (LLPs) are now eligible to raise ECB, widening access to offshore borrowing for entities that often rely on domestic bank credit or private funding.

MAMP standardised, with a manufacturing carve-out

RBI standardised MAMP at 3 years, replacing the earlier end-use linked MAMP range of 3 to 10 years. For manufacturing entities, RBI allows ECB with MAMP ranging between 1 to 3 years, subject to an outstanding cap of USD 150 million for shorter-tenor borrowings. The revised framework also clarifies that call and put options should not be exercised before completion of MAMP. This structure reduces complexity in maturity compliance while still placing tighter conditions around shorter maturities.

ECB borrowing limits raised and cost ceiling aligned to markets

The revised framework increases the ECB limit from USD 750 million to the higher of USD 1 billion outstanding or 300% of the borrower’s net worth, on a standalone basis. RBI also clarified that ECB limits should not apply to eligible borrowers regulated by financial sector regulators.

On pricing, the all-in-cost ceiling is to be as per prevailing market conditions, subject to arm’s length requirements in case of related-party transactions. This shifts the ceiling closer to market-determined outcomes while retaining safeguards where lender and borrower are related.

What the revised ECB framework excludes

RBI also listed specific exclusions from the Revised ECB Framework, subject to compliance with applicable regulations. These include investments by a Foreign Venture Capital Investor (FVCI) in debt instruments, investments received through convertible notes, investment in debt instruments by non-residents such as Foreign Portfolio Investors (FPI), export advances, and trade credit with original maturity up to 3 years. These exclusions clarify boundaries between ECB and other cross-border funding channels.

Digital payment safety: proposed fraud compensation cap

RBI proposed a framework to compensate customers for losses arising from small-value fraudulent transactions, with compensation capped at Rs 25,000 per customer. The central bank also said it will release a discussion paper on enhancing the safety of digital payments. Measures under consideration include lagged credit mechanisms and additional authentication requirements for specific user segments, particularly senior citizens, to reduce the risk of fraud. These steps place consumer protection and payment safety at the centre of RBI’s supervisory agenda.

Financial inclusion changes: LBS, KCC, BC Model and MSME relief

RBI said it has undertaken a comprehensive review of key financial inclusion frameworks including the Lead Bank Scheme (LBS), Kisan Credit Card (KCC) Scheme, and the Business Correspondent (BC) Model. Draft revised guidelines are to be issued to improve effectiveness and delivery. RBI also announced a unified reporting portal to strengthen monitoring and data management under the Lead Bank Scheme.

On MSME credit, RBI increased the limit for collateral-free loans from ₹10 lakh to ₹20 lakh. Separately, RBI said banks will be allowed to lend to Real Estate Investment Trusts (REITs), subject to specified prudential safeguards, linking credit policy to broader financing channels.

Urban Cooperative Banks: changes to strengthen resilience

To bolster the resilience of Urban Cooperative Banks (UCBs), RBI unveiled four measures. The steps include raising financial limits on unsecured loans and loans to nominal members. RBI also proposed removing tenor and moratorium-related restrictions on housing loans extended by Tier III and Tier IV UCBs. The changes are positioned as operational and prudential updates aimed at improving flexibility within a supervised framework.

Market and capital markets: VRR cap removal and derivatives roadmap

On the market side, RBI removed the Rs 2.5 lakh crore investment cap under the Voluntary Retention Route (VRR), while retaining existing investment limits under the General Route. In line with the Union Budget 2026–27, RBI will issue a regulatory framework for derivatives on corporate bond indices and total return swaps on corporate bonds. These measures are directly relevant for bond market participation and the evolution of hedging and index-linked products.

Transaction accounts: current, overdraft and cash credit norms eased

RBI also eased norms for Current, Overdraft and Cash Credit accounts. It removed restrictions on cash credit accounts for borrowers with ₹10 crore exposure and allowed any lender with more than 10% exposure to maintain current or OD accounts. At the same time, RBI rejected proposals to dilute monitoring norms or extend the 2-day transfer rule, retaining stricter controls around fund flows, compliance, and misuse prevention. The net effect is greater operational flexibility for banks without dropping monitoring requirements.

Capital framework proposals: risk weights, ECL timeline, and large borrower rules

RBI proposed a more nuanced and granular risk-weight framework for bank exposures to MSMEs, corporates, and real estate. For housing loans to individuals, risk weights are proposed to vary by loan-to-value (LTV) ratio and the number of loans held by the borrower. For up to two loans, proposed risk weights range from 20% to 40%; for third and subsequent loans, they range from 30% to 60%. RBI also proposed commercial real estate risk weights of 100% for residential housing projects and 150% for other commercial real estate exposures.

RBI separately proposed including “transactors”, credit card users who have fully repaid balances for at least the previous 12 months, in the regulatory retail category. On provisioning, RBI said implementation of the expected credit loss (ECL) rules will take effect on April 1, 2027, and noted a proposed five-year transition period, while inviting public comments on both drafts until November 30.

RBI also indicated it plans to withdraw the older framework that penalised banks for lending to very large corporates with system-wide exposure above Rs 10,000 crore, with systemic risks to be managed through macroprudential tools and individual exposure caps under the large exposure framework.

Key numbers at a glance

How market participants are reading the policy stance

Kunal Shah, Co-founder, SURE, said the RBI’s decision to keep the repo rate unchanged at 5.25% reflected the MPC’s view that the outlook on growth and inflation is positive, and noted the inflation outlook is closer to the 4% target. Beyond the policy rate, the breadth of regulatory measures suggests RBI is using supervision, product rules, and prudential settings to influence credit transmission and risk management. The ECB overhaul and current account rule changes directly affect funding and operational mechanics for borrowers and banks. Meanwhile, the consumer protection and digital payments agenda increases expectations on controls, authentication and grievance outcomes.

Conclusion

RBI’s latest package combines liberalisation, tighter consumer safeguards, and a push for more risk-sensitive banking rules. The revised ECB framework, changes to transaction account rules, and inclusion-linked updates sit alongside proposals on risk weights and the ECL roadmap. The next milestones include RBI’s promised discussion paper on digital payment safety, draft revised guidelines for LBS, KCC and the BC Model, and the consultation process for the proposed credit risk and ECL changes with comments invited until November 30.