The Reserve Bank of India has introduced comprehensive changes to foreign exchange management rules, implementing new regulations that significantly restrict cross-border guarantee arrangements between residents and non-residents.

New FEMA Guarantee Regulations

Under the Foreign Exchange Management (Guarantees) Regulations, 2026, the central bank has established clear prohibitions on guarantee arrangements involving residents and non-residents. The regulations state that no person resident in India can be a party to a guarantee where any other party is a person resident outside India, except in accordance with the specified regulations.

Expanded Definition and Scope

The RBI has broadened the definition of guarantees to encompass counter-guarantees and liability portfolios, creating a more comprehensive regulatory framework. This expansion ensures that various forms of financial commitments fall under the regulatory purview, preventing potential circumvention of the rules through alternative guarantee structures.

Permitted Arrangements Under Specific Conditions

Resident Indians can still act as guarantors or principal debtors under certain circumstances. The underlying transaction must be permitted under FEMA and related regulations, and both the surety and principal debtor must be authorized to lend to or borrow from each other under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

Key Exemptions and Exceptions

The regulations provide several important exemptions to ensure legitimate banking and business operations continue unimpeded:

• Fully collateralized authorized dealer banks
• Agents of foreign shipping or airline companies
• Resident-to-resident guarantee arrangements
• Guarantees by authorized dealer bank of india branches outside India or in International Financial Services Centres
• Arrangements complying with Foreign Exchange Management (Overseas Investment) Regulations, 2022

Specialized Financial Instruments

The RBI has also addressed Irrevocable Payment Commitments (IPCs) in the new framework. IPCs issued by authorized dealers acting as custodian banks are exempted when the principal debtor is a registered Foreign Portfolio Investor and the creditor is an authorized central counterparty in India.

These new regulations represent a significant shift in India's foreign exchange management approach, emphasizing stricter controls on cross-border financial commitments while maintaining necessary exemptions for legitimate business operations.

Reserve Bank of India Deputy Governor Swaminathan J has called for a fundamental transformation in banking supervision, urging financial institutions to adopt continuous monitoring practices rather than relying on periodic compliance checks. Speaking at the Third Annual Global Conference of the College of Supervisors, he emphasized the critical need for banks to strengthen their operational discipline throughout the year.

Shift from Traditional Supervision Methods

The deputy governor highlighted that traditional supervisory approaches are becoming inadequate in the digital era. For decades, supervisors have been trained to read balance sheets and inspect processes using conventional methods. However, Swaminathan pointed out that a bank of india can appear perfectly healthy on paper while remaining vulnerable to severe disruption from a single incident.

"The reason is that the centre of gravity is shifting from the 'branch and product' to the 'pipes and code'," he explained. This fundamental shift means that stability now depends equally on operational resilience, data integrity, and third-party dependencies as it does on traditional metrics like capital and liquidity.

Enhanced Focus on Grievance Management

Swaminathan emphasized that grievance management systems serve as critical early warning indicators in the digital environment. He outlined several key supervisory questions that institutions must address:

Three-Pillar Supervisory Framework

The deputy governor outlined three essential shifts required for effective modern banking supervision:

• From periodic snapshots to continuous awareness: Real-time monitoring replacing quarterly assessments
• Beyond single institution focus: Taking a comprehensive view of the entire banking ecosystem
• Enhanced stress testing: Moving from simple compliance checks to evaluating resilience and recovery capabilities

"We need to move from asking only 'did you comply?' to also asking 'can you withstand stress, recover quickly, and protect customers when things go wrong?'" Swaminathan stated.

Operational Requirements for Banks

For supervised entities, the deputy governor established clear operational expectations. Compliance cannot be treated as a quarter-end activity, requiring banks to maintain stronger operational discipline and data governance throughout the year. When anomalies are flagged, the ability to explain and fix issues quickly becomes a marker of control maturity.

Third-Party Risk Management

Swaminathan stressed that third-party management must be treated as comprehensive risk management. Banks need better oversight of partners, clearer accountability for incidents, and contracts that support audit access and resilience. He emphasized that regulated entities cannot outsource their fundamental responsibilities to third parties.

AI and Analytics Supervision

As artificial intelligence and analytics become more embedded in banking operations, institutions should prepare for intensive supervisory scrutiny. Banks must be ready to address questions regarding model risk, explainability, and fairness in their AI implementations, reflecting the evolving regulatory landscape in the digital banking sector.