The Reserve Bank of India (RBI) has launched a renewed drive to strengthen the banking sector's defences against fraud and ensure better safeguards for customers. The central bank has issued clear instructions to lenders, focusing on clearing the mounting backlog of pending KYC (Know Your Customer) updates and putting a stop to the mechanical rejection of applications.
Cracking Down on KYC Delays and Rejections
The regulator expressed concern that lapses in KYC procedures severely weaken the system's ability to prevent fraud and can lead to the financial exclusion of customers, especially in rural and semi-urban areas. To address the growing backlog, RBI has directed banks to organise special camps and launch intensive campaigns, with particular attention needed at smaller branch locations.
In a significant move, the RBI cautioned banks against the routine or automatic rejection of onboarding or KYC-updation requests. It stressed that such requests must not be turned down without due consideration, and lenders are required to properly document the specific reasons for any rejection. The central bank revealed its own involvement in a nationwide re-KYC drive at the gram panchayat level between July and October 2025, underscoring the scale of the effort required.
Combating New-Age Financial Threats
This push on KYC compliance is part of a broader strategy to curb financial crime, which is becoming increasingly sophisticated. The RBI's report highlights that cyber and operational incidents now pose a growing threat to overall financial stability. In response, the regulator is collaborating closely with other authorities, including the Ministry of Home Affairs, to develop and implement measures aimed at curbing digital and cyber-enabled fraud while strengthening customer protection frameworks.
Technology is at the forefront of this counter-fraud effort. Key recent initiatives include:
- MuleHunter.ai: A system designed to identify and flag mule accounts by leveraging system-wide learning.
- Digital Payments Intelligence Platform: An AI-powered platform that detects risky transactions and shares intelligence across the banking network.
Banks have also been advised to actively use the mobile number revocation list available on the Department of Telecommunications' digital intelligence platform. This will help clean customer databases and prevent fraud carried out via voice calls and SMS. Furthermore, lenders are instructed to tighten internal controls, ensure adequate grievance-redress officers at all levels, and invest in promoting digital financial literacy.
Tackling the Persistent Risk of Mis-Selling
Beyond fraud, the RBI has identified mis-selling of financial products as a persistent conduct risk with significant consequences for both customers and the broader financial system. The report states that such practices by regulated entities undermine trust. In response, the RBI plans to issue comprehensive new guidelines covering advertising, marketing, and sales practices across different categories of regulated entities, with the explicit goal of preventing mis-selling.
The combined focus on KYC hygiene, technological innovation, and ethical sales practices marks a holistic approach by the regulator to build a more secure and customer-centric financial ecosystem in India.
