No regulator should substitute boardroom judgement: RBI Governor Malhotra

Financial stability remains the 'North Star' for the central bank

Reserve Bank of India (RBI) Governor Sanjay Malhotra on Friday said it was not the regulator’s job to take decisions for bank boards, speaking in the context of the wide range of enabling reforms announced for lenders during the October monetary policy review, and emphasised that financial stability remained the regulator’s focus. 

The central bank announced 22 regulatory measures  last month, which included a nod for banks to finance acquisitions, higher limits on loans against shares, and draft norms for transitioning to the expected credit loss (ECL) framework for loan loss provisioning. 

Indian banks’ financial health has improved in the last decade and they also have more freedom to do business, Malhotra indicated. “No regulator can, or should, substitute for boardroom judgement, especially in a diverse country such as ours. Each case, each loan, each deposit, each transaction is different, with varying risks and opportunities,” the Governor said at the SBI Banking and Economics Conclave. 

“We need to allow the regulated entities to take decisions based on the merits of each case, rather than prescribing a 'one size fits all' rule. This will enable regulated entities to experiment and innovate, learn and improve,” he said. 

While noting that there is a trade-off between stability and efficiency, and regulation to enhance stability too is not devoid of costs, Malhotra underlined that at the same time, financial stability remains the pole star for the RBI. 

“For us in the Reserve Bank, financial stability remains the North Star, for short term growth achieved at the cost of financial stability can have bigger consequences for long-term growth. Research shows that financial instability may not only more than offset the gains of higher short term growth, but also make recovery more distressful and longer,” Malhotra said. The recent regulatory proposals strive to maintain this balance — the balance between the drive to innovate and grow and the duty to protect, he stressed. 

Allowing banks to finance acquisitions is acknowledged worldwide as an integral part of an evolved financial system and it helps in the better allocation of financial resources. At the same time, there are restrictions to ensure safety. 

“Removal of the restriction (on acquisition financing) on banks will benefit the real economy. The proposed guardrails like limiting bank funding to 70 per cent of deal value, limits on debt to equity ratio, aggregate exposure limits relative to Tier-1 capital, and eligibility criteria will contain concentration and credit risks, thereby ensuring safety while allowing banks and their stakeholders to reap benefits of additional business,” he said. 

Recent regulatory measures should be seen in the context of better financial health of banks, like higher capital adequacy ratio, asset quality and improved profitability, he said. 

He cited credit and deposits which have expanded almost three times in the last 10 years. Capital buffers have strengthened and asset quality has also improved with Gross non-performing assets (NPAs) and Net NPAs reduced to 2.3 per cent and 0.5 per cent in March 2025, respectively, after rising to highs of 11.2 per cent and 5.96 per cent, respectively, in March 2018. Profitability of banks has enhanced significantly between 2017-18 and 2024-25, as Return on Assets increased from -0.24 per cent to 1.37 per cent, and Return on Equity jumped from -2 per cent to 14 per cent. 

“This evolution implies that prudential rulebooks too should evolve in a calibrated manner as banks are now stronger and supervision more alert even as alternative risk-bearing pillars have deepened and market-based risk transfer mechanisms have become more effective…Regulation cannot ignore this performance, these changed realities,” he said. 

Malhotra said the revised external commercial borrowing norms – which have done away with the all-in cost ceilings – were framed on the backdrop of a strong external sector. 

India’s current account recorded a surplus of USD 13.5 billion (1.3 per cent of GDP) in Q4 FY25, followed by a modest deficit of USD 2.4 billion (0.2 per cent of GDP) in Q1 FY26. Foreign exchange reserves stand at about USD 690–700 billion, sufficient to cover nearly 11 months of merchandise imports and the capital account remains robust. 

“The recalibration of the ECB framework is a natural step in India’s financial evolution - grounded in strong fundamentals, guided by prudence, and inspired by confidence in the economy’s capacity to engage with global finance on its own terms. Linking the borrowing limits to the borrower’s net worth under automatic route links ECB to the strength of the borrower, while enhancing ease of doing business,” he concluded.