If Regulator Steps Back, Who Steps In?

The Reserve Bank of India, like any institution of scale and consequence, is not without its flaws. It has faced criticism over the years for occasional opacity, institutional inertia, and lapses in regulatory foresight. Some of those critiques are neither invalid nor unexpected. But to conflate imperfection with irrelevance is a fundamental misreading of the RBI’s institutional role.

A recent commentary characterising the RBI’s supervision as procedural theatre and disconnected from modern financial realities misjudges both the complexity of regulation and the function of oversight in a rapidly evolving financial ecosystem.

To be fair, the article rightly underscores certain challenges in India’s supervisory landscape that merit attention. The call for more outcome-oriented supervision rather than a compliance-heavy, checklist-driven approach is an industry wishlist. The argument that regulatory capacity must evolve in parallel with the complexity of financial products is both timely and essential. It is also true that a more analytically rigorous and transparent supervisory framework—one that avoids micromanagement while deepening sectoral insight—is in the interest of both systemic stability and institutional accountability. 

These are constructive observations and deserve to be part of the ongoing conversation on regulatory reform. However, recognising these areas for improvement must not come at the cost of undermining the legitimacy, necessity, or urgency of regulatory vigilance itself.

Can one assume that without specific rules and regulations, and at times even indicative boundaries of expected behaviour, the regulated entities will behave in good way? No, is the consumer view and market experience. Simply because even with the current rules and supervision, there are so many issues that the regulated entities create, and many of regulatory behaviour cracks persist. 

What sets the RBI apart is not flawlessness but resilience. It is this institutional resilience—its ability to adapt, intervene, correct, and course-correct—that has repeatedly safeguarded Indian financial markets from systemic breakdown. To suggest that India’s central bank should “go slow” or “do less” under pressure from lobbying interests is not a prescription for anything constructive. It might end up privileging the balance sheets of a few over the financial stability of the many.

Let there be no mistake. Calls for regulatory temperance are often cloaked in the language of efficiency, innovation, and freedom. In practice, they serve to expand private vaults while transferring the eventual risk to the public. Financial history, both global and domestic, is replete with examples of what happens when regulatory vigilance is traded for market appeasement.

Institutional Responsibility
What becomes of a financial system when the very architecture of supervision is framed as ritualistic rather than essential? What are the consequences when regulated entities begin to view oversight as an inconvenience rather than a necessity? What happens when shareholder primacy eclipses consumer protection, and when regulatory scrutiny is seen not as a safeguard but as an obstacle to growth?

The RBI’s supervisory architecture is the foundation of trust in a system that intermediates trillions of rupees daily across banks, NBFCs, fintechs, and markets. In a world where capital moves in milliseconds and risk is increasingly embedded in code, the supervisory posture of a central bank cannot afford to be minimal, passive, or ceremonial.

The financial sector has no shortage of actors willing to declare themselves prudent, transparent, and consumer-centric. But history tells a more cautionary tale. Institutions left to self-regulate have routinely placed return on equity above duty of care. Without firm supervision, risk becomes invisible until it becomes systemic. Consumers are treated as balance sheet instruments. Innovation becomes a euphemism for regulatory arbitrage.

The myth of the “holier than thou” regulated entity is precisely that—a myth. This is why a robust, sometimes uncomfortable supervisory regime is not a constraint but a necessity.

Evolution, Not Stagnation
Far from being wedded to legacy mechanisms, the RBI has been building a supervisory framework that reflects the complexity of today’s financial ecosystem. It has embraced risk-based supervision. It has invested in digital oversight through platforms like DAKSH that provide real-time risk surveillance, reduce compliance fatigue, and ensure granular monitoring of high-risk entities. The establishment of the College of Supervisors is not a cosmetic reform. It signals a structural commitment to deepening regulatory intellect, judgement, and analytical depth within the supervisory cadre.

Critics have pointed to RBI’s interventions in select entities as evidence of overreach. This is a misreading of the regulator’s role. When the RBI restricts onboarding, caps operations, or demands remediation, it is reasserting public accountability.
Supervision that is afraid to act is worse than supervision that acts assertively. Regulatory ambivalence rewards opacity. Regulatory clarity, even when inconvenient, upholds system integrity.

Recent supervisory actions demonstrate that the RBI is willing to confront governance failures, intervene pre-emptively, and communicate consequences. These are hallmarks of credible regulation.

Consumer Protection 
A robust financial system cannot exist without placing the consumer at its core. In this respect, the RBI has made commendable strides. The guidelines on digital lending, data governance, and grievance redressal mechanisms are designed to create transparency, reduce asymmetry, and prevent exploitation.

The Unified Ombudsman Scheme unifies consumer recourse across banking, NBFCs, and digital channels. Its approach to mandating informed consent, protecting user data, and curbing predatory practices is structurally aligned with long-term stability and inclusion.

India’s digital financial infrastructure—from UPI to Account Aggregators—has flourished under RBI’s stewardship. The regulator has supported experimentation through controlled environments like the Regulatory Sandbox. It has enabled innovation not by abandoning prudence but by embedding it within structured boundaries.

There is no inherent conflict between innovation and regulation. What the RBI has resisted is reckless disruption that prioritises investor hype over consumer risk. That is not conservatism. That is institutional maturity.

Without a Referee?
Ultimately, markets do not correct themselves. They react. They arbitrage. They expand risk until it bursts. Without a vigilant referee, the rules get bent, the weak get priced out, and the system becomes fragile from within. In that equation, the Indian saver, the small borrower, the rural bank customer, and the emerging digital consumer are left exposed. 

India’s financial future is deeply intertwined with the credibility of its institutions. A regulator that listens but does not bend, that evolves but does not capitulate, that supervises with judgment and acts with resolve is a regulator worth defending.

The RBI’s path is not flawless. But it is firm. It is learning. And it is deeply necessary.
To erode the authority of supervision today is to invite fragility tomorrow. And when that day comes, it is never the lobbyists who bear the cost. It is the people.  

Also read:
RBI's Supervision Needs Repair, Not Just More Rituals