RBI, North Block may finetune regulations for Viksit Bharat 2047

A report by Knight Frank India said supply-to-demand ratio for affordable housing across the top 8 cities plummeted to 0.36 in 2025 (until June), down from 1.05 in 2019

The regulatory topography

 

The setting up of the Regulatory Review Cell (RRC) by Mint Road to be housed in its Department of Regulation (effective October 1, 2025) was a critical step. Its mandate: To ensure regulations are subject to a comprehensive and systematic internal review every 5-7 years. In effect, the RRC built on the Regulatory Review Authority (RRA 2.0). The latter drew from the best practices of global central banks. Be it on consultation before policy formulation, feedback from regulated entities (REs), structured meetings with banks’ corner room occupants and senior compliance officials, key stakeholders and trade bodies.

 

Over 400 circulars were withdrawn. It was the “open-door policy” of the Reserve Bank of India (RBI) to foster a better engagement of REs with it. RRA 2.0 was a follow-through on YV Reddy’s decision as deputy RBI governor to set up its first edition in 1999 (he was later appointed governor in September 2003 and served in the position for five years).

 

The polestar for Reddy may well have been the 96th Report of the Law Commission of India (1984): “Every legislature is expected to undertake what may be called the periodical spring-cleaning of the corpus of its Statute Law, in order that dead wood may be removed, and citizens may be spared of the inconvenience of taking notice of laws which have ceased to bear any relevance to current conditions.”

 

The forward movement with RRC also puts the spotlight on a key initiative flagged in the Union Budget FY24 by Finance Minister Nirmala Sitharaman. She had held forth on the need for better governance and investor protection in the banking sector. And, the FM proposed amendments to the RBI Act, 1934; the Banking Regulation Act, 1949; and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. It was felt that these issues would gather momentum after a new government was sworn in post the general elections in June 2024.

 

Now, with the increased interconnectedness in the financial markets, it is speculated that the regulatory reviews may see participation from the Securities and Exchange Board of India (Sebi), the Insurance Regulatory and Development Authority (Irdai), and Pension Fund Regulatory and Development Authority (PFRDA).

 

It is also possible that some of the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), which submitted its report in 2013, may be back in play.

 

The FSLRC was set up by the Centre on March 24, 2011, to review and rewrite the legal-institutional architecture of the Indian financial sector. It was for the creation of a financial sector appellate tribunal and to merge all trading regulation under a unified financial agency. It remains to be seen how regulators view these suggestions now that more than a decade has passed since FSLRC made its views public.

 

What to expect: Heavy-duty action on regulatory turf

 

Corporate governance at banks

 

In October 2023, Mint Road said that private banks needed to have at least two whole-time directors, including the managing director and chief executive officer. This was in the light of the growing complexity in banking. “… it becomes imperative to establish an effective senior management team to navigate the ongoing and emerging challenges,” the RBI had held. And, also deal with succession planning. But the developments at IndusInd Bank and Karnataka Bank, which saw their respective bosses and key personnel move on double-quick, show that bank governance may warrant closer attention. Basically, it was a more intense version of the exercise undertaken by former RBI Governor Shaktikanta Das with the boards of state-run and private banks three years ago. It had taken up governance, ethics, role of the boards and supervisory expectations.

 

Governance will be in the spotlight. All the more so as there is the unsettled issue of new bank licences. More specifically, the stance of the RBI’s Internal Working Group (IWG) to “Review extant ownership guidelines and corporate structure for Indian private sector banks”. The IWG had on November 20, 2020, made a case for large corporate and industrial houses as promoters of banks. And, large non-banking financial companies (NBFCs) with an asset size of ₹50,000 crore and above, including those owned by corporate houses, may be considered for conversion into banks.

 

Mint Road, while accepting 21 of IWG’s 31 recommendations, had said: “The remaining recommendations are under examination” in its press release of November 26, 2021. This was read by private bank licence hopefuls that the issue was still open. A bank licence for industrial houses looks unlikely; the IWG itself had referred to concerns over connected lending and exposure between banks and other financial and non-financial group entities, and the need for strengthening the supervisory mechanism for large conglomerates, including consolidated supervision.

 

What to expect: More premium on governance

 

Making affordable more so

 

Affordable housing may get a look-in the Union Budget (and later from Mint Road) as it is going off-script. A unit is classified as “affordable” when priced at ₹45 lakh or less; it has variables to it – in the metros, it is ₹45 lakh or less with the carpet area capped at 60 square metres; in the non-metros, this is at 90 square metres under government schemes. According to a report by Knight Frank India (in association with the National Real Estate Development Council), the supply-to-demand ratio for affordable housing across the top eight cities plummeted to 0.36 in 2025 (until June), down from 1.05 in 2019, signalling a significant undersupply in the segment. Launches are now barely a third of sales, underscoring a deepening imbalance that threatens to impact housing affordability and limit buyer choice. The share of affordable housing under ₹50 lakh stood at 17 per cent, a sharp decline from 52.4 per cent in 2018.

 

While banks and non-banking financial companies (NBFCs) can finance real-estate projects, the same for buying land is a no-go area for banks (not so for NBFCs). This is because the RBI treats banks differently as they are deposit-taking entities. It enforces its sensitive sector exposure norms: to the capital markets, commodities and realty.

 

Mint Road has played its part. It has revised affordable housing norms under banks’ priority sector lending (PSL). In the metros (population of 5 million and above), the loan limit has been hiked to ₹50 lakh from ₹35 lakh with a maximum cost of ₹63 lakh. For geographies with population between one million and 5 million, the limit is ₹45 lakh (₹35 lakh) with a maximum property cost of ₹57 lakh. For a population below one million, it is ₹35 lakh (₹25 lakh), with a maximum of ₹44 lakh. This move was to align affordable housing finance flows to the increase in property costs and inflation.

 

But the heavy lifting needed for affordable housing is largely being done by housing financing companies (HFCs), more so for lower-ticket loans. Industry sources are of the view that the risk weighting on such loans may be relooked at. Currently, NBFCs maintain risk-weights at 100 per cent for housing loans; it is 35 per cent for banks and HFCs (which are a variant of NBFCs). So, while the RBI has upped the cap on PSL-eligible housing loans, it has led to a situation wherein banks opt to give more of the higher-ticket loans to quickly meet their PSL targets (as such, loans generally carry less probability of default) with HFCs taking on more of the smaller loans.

 

What to expect: Linking affordable housing limits to geographies; a relook at risk weighting across regulated entities’ and whether banks can be allowed to finance land-bank purchases.

 

At the bottom of the pyramid

 

Microfinance institutions (MFIs) are in a tight spot: The sixth consecutive quarterly southward movement in their portfolio to ₹1.31 trillion as of September 2025 from ₹1.6 trillion in March 2024 led to about a half-million customers getting pushed out of the ambit of these entities, according to data from Microfinance Institutions Network. MFIs feel there has been an improvement in the way they go about their business. They have adopted measures such as limiting the number of lenders to a client to three and capping loans (unsecured included) to a client to ₹2 lakh. 

 

As a result, over-leverage and lending concerns have been corrected to a great extent and are no longer a major issue. CareEdge held that early signs of improvement are visible, whereby gross non-performing levels declined to 3.7 per cent in September 2025, down by 100 basis points from March 2025, aided by write-offs and cautious lending. The hope is for a credit guarantee scheme (the demand is for ₹20,000 crore) in the Union Budget for FY27. In June last year, Mint Road gave a breather: MFIs qualifying assets threshold was cut to 60 per cent over the earlier requirement of 75 per cent. This helped them improve loan diversity, thereby augmenting their credit risk profile. But the worst may not be over. With the state election season set to begin — when political parties typically throw fiscal caution to the winds while promising freebies — MFIs fear its impact on credit discipline. They have raised the issue of loan waivers with the RBI and North Block. Assam, Kerala, Tamil Nadu and West Bengal are set to go to polls in 2026.

 

It has been pointed out that even the well-meaning Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance (2025) affected collections. The ordinance excluded RBI-regulated entities in the microfinance business — be they MFIs or banks — but confusion held within the state administration and customers regarding its scope. The Tamil Nadu Money Lending Entities (Prevention of Coercive Actions) Bill (2025) to protect vulnerable groups from aggressive tactics used by money-lending firms also affected MFIs’ collections. Matters could improve if Mint Road were to give Section 8 companies, or not-for-profit entities, involved in microfinance, access to credit information companies (CIC). Under the CIC (Regulation) Act (2005), only RBI-regulated entities can hook into credit bureaus — that is sharing data with and accessing it from them.

 

What to expect: A credit guarantee scheme for the industry (the demand is for ₹20,000 crore) in the Union Budget for FY27. Mint Road’s nod for Section 8 microfinance firms (or not-for-profit entities) access to credit information companies.

 

Banking on reforms

 

• With the increased interconnectedness in the financial markets, it is speculated that the regulatory reviews may see participation from Sebi, Irdai, and PFRDA
• In October 2023, Mint Road said that private banks needed to have at least two whole-time directors, including the MD and CEO. This was in the light of the growing complexity in banking
• The IWG had on November 20, 2020, made a case for large corporate and industrial houses as promoters of banks 
• Large NBFCs with an asset size of ₹50,000 crore and above, including those owned by corporate houses, may be considered for conversion into banks
• Affordable housing may get a look-in in the Budget (and later from Mint Road) as it is going off-script. A unit is classified as “affordable” when priced at ₹45 lakh or less
• It has variables to it – in the metros, it is ₹45 lakh or less with the carpet area capped at 60 square metres; in the non-metros, this is at 90 square metres under government schemes
• MFIs feel there has been an improvement in the way they go about their business. They have adopted measures such as limiting the number of lenders to a client to three and capping loans (unsecured included) to a client to ₹2 lakh 
• As a result, overleverage and lending concerns have been corrected to a great extent and are no longer a major issue