RBI Takes Action Over FEMA Breach and Digital Lending Concerns

What happens when loan repayments don’t follow RBI’s rulebook or banks skip critical checks before sanctioning term loans? The Reserve Bank of India (RBI) answered that this week by penalising two major financial players, HDFC Bank and Shriram Finance, for different violations under regulatory laws.

Not long ago, borrowers using app-based lenders weren’t aware that loan repayments needed to be routed in a very specific way from their own bank accounts to the lender’s bank account directly. This fine detail has now drawn regulatory heat.

On July 11, 2025, the Reserve Bank of India issued two separate orders penalising HDFC Bank and Shriram Finance Ltd. for ₹4.88 lakh and ₹2.70 lakh respectively. These actions followed statutory inspections and enforcement proceedings carried out in line with central banking laws and digital lending norms.

The central bank said these penalties do not question the legitimacy of any loan or customer transaction but strictly apply to regulatory compliance failures.

HDFC Bank Booked for FEMA Irregularities

The penalty imposed on HDFC Bank relates to a term loan granted to a company with foreign investment. According to the Master Direction on Foreign Investment in India, banks must ensure certain checks before disbursing such loans.

Read More – How to Avoid Hidden Bank Charges That Eat Up Your Savings

In this case, RBI found the bank had issued the loan without confirming full compliance under the Foreign Exchange Management Act (FEMA), 1999, especially Section 11(3). The issue was unearthed during a routine scrutiny under FEMA provisions. Later, the RBI sent a formal notice. The bank replied in writing and also met in person. But the RBI was not convinced.

It called the issue a technical error, not intentional, but still enough to take financial action under the rules.

Shriram Finance in Trouble for Digital Lending Violations

Shriram Finance faced action for flouting the RBI (Digital Lending) Directions, 2022, revised in 2025. During a statutory inspection of the company’s books as of March 31, 2024, it was found that certain loan repayments were being routed through third-party accounts, instead of being paid directly from the borrower's bank account to the lender’s bank account.

This specific route is forbidden under digital lending rules that aim to increase transparency, reduce fraud, and protect borrower data. The RBI considered this as a direct violation of its operational guidelines and responded with a ₹2.70 lakh fine after giving the company a chance to explain its side.

The enforcement notice was dated July 8, 2025, just a few days before it was made public.

A Quick View at the RBI’s Regulatory Actions

Institution	Penalty (₹)	Violation Type	Law/Direction Invoked
HDFC Bank	4.88 lakh	FEMA term loan process lapse	FEMA 1999 – Section 11(3)
Shriram Finance	2.70 lakh	Digital repayment routing error	RBI Digital Lending Directions (2025 revision)

Source

To understand this better, it’s helpful to look at how digital lending rules differ from regular lending methods.

Digital Lending: What Are the RBI’s Conditions?

Requirement	RBI Directive (2025)	Breach Identified in
Repayment must come from borrower's account	Mandated for transparency and security	Shriram Finance
No routing through pool or third-party a/c	Prohibited to avoid fraud risks	Yes
Lending service must disclose all parties	Required during digital onboarding	Not flagged in this case

This new category of rules was strengthened after multiple complaints over unauthorized deductions, data breaches, and non-transparent processing in digital loan services.

FEMA Checks Before Granting Loans

Banks lending to companies with foreign investments need to ensure they comply with sectoral caps, pricing norms, and reporting structures. These are listed in RBI’s Master Directions updated annually.

In the case of HDFC Bank, the following checkpoints were missed:

Compliance Requirement	Applicable Regulation	Was it Followed?
Verification of downstream investment rules	Master Direction on FDI	Not adequately checked
Prior registration and approvals if needed	FEMA Section 11(3)	No clear documentation
Reporting transaction post-disbursement	RBI’s foreign transaction platform	Not filed in time

RBI’s Statement on Customer Transactions

While penalties have been imposed, the RBI clearly noted that "the action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the entities with their customers."

Also Read - How to Download Shriram Finance Loan Statement

This means no borrower or depositor needs to worry about the status of their loans or accounts at these institutions. The fines are purely administrative and designed to enforce systemic discipline.

Stricter Norms on Digital Lenders Ahead

According to a Reuters report dated December 19, 2024, the Indian government is planning a law that would make unauthorised digital lending a criminal offence, with possible prison terms and heavier fines. This is a strong signal that digital lending platforms, NBFCs, and their tech partners will be held accountable to stricter standards in the coming months.

This context adds more weight to why violations like Shriram’s are being watched more closely by the central bank.

Conclusion

The RBI’s penalty notices on HDFC Bank and Shriram Finance reflect a wider shift in how Indian financial regulators are tightening enforcement across traditional and tech-driven lending sectors. While the penalties are modest, the messaging is firm.

Going forward, banks and NBFCs are likely to face even closer scrutiny, especially in sectors involving foreign money, third-party tech integrations, and digital repayment tools.

Other News Pages
Big Govt Payments to Move via RBI e-Kuber from July 16	RBI Ends Prepayment Penalties, Relief for Small Borrowers	RBI Fines HDFC Bank & Shriram Finance for Compliance Lapses	Indian Banks’ Role in Empowering Women SHGs Highlighted
Centre Disburses ₹30,000 Crore Interest-Free Capex Loans to States	Equitas Small Finance Bank May Raise Capital via NCDs on July 21	Maharashtra: Online Hypothecation Removal for Vehicle Loans Explained	Loan via UPI Soon: Withdraw Credit from Gold, FDs, Property
RBI’s Record Fund Infusion Fails to Boost Loan Growth	ADB Approves ₹975 Crore Loan for Industrial Infra in Tripura	Ex-ICICI CEO Chanda Kochhar Guilty in Videocon Loan Case	Private Banks See Spike in Bad Loans from Agri & Small Lending
RR District Re-Launches Loan Scheme for Persons with Disabilities	No GST Rate Cut Yet, Final Call with GST Council	JPMorgan May Launch Loans Backed by Bitcoin, Stablecoins	Wilful Defaulters Owe ₹1.62 Lakh Crore to PSU Banks: Govt
Laxmi India Finance to Raise ₹254 Crore via IPO from July 29	Raghuram Rajan Urges Focus on Local Governance in Finance Panel	Agri Loans Cross ₹28 Lakh Crore; Govt Denies Waiver Plans	Petronet Seeks ₹12,000 Crore Local Loan for LNG Projects