Mint Road in 2025: A year filled with opening doors and tightening screws

The year saw Mint Road push banks towards capital markets, revisit deposit insurance and revive UCB licensing, signalling reform that expands opportunity without diluting caution

2025 saw a lucrative business segment being opened up for banks in India – the financing of mergers and acquisitions (M&As). It has thus far been the exclusive stomping ground of foreign banks (even though its funding remains offshore – as in, it’s not on the books of these entities’ rupee books) and a few select shadow banks. This is set to change with Mint Road’s draft on ‘commercial banks: capital market exposure’. While there is no sizing study on the M&A business, banks – irrespective of the colour of their capital – will get free play. M&As are set to reshape India Inc – annual deal volumes are well above the $100 billion mark. This will, of course, call for rewiring banks (once operational guidelines are issued) when they step into the trade, as it will segue lenders with a collateral-backed legacy into the equities markets.

 

Mint Road is understandably cautious. Banks’ aggregate M&A finance exposure is not to exceed 10 per cent of their Tier-I capital; it is to be made available only to listed companies with a “satisfactory” net worth and a profit-making record of three years. And they can finance only up to 70 per cent of the acquisition value; the rest is to be brought in by the acquirer as equity using its own funds. It is clear that only the bigger banks get to play a meaningful role in this area.

 

What is interesting is that the Reserve Bank of India (RBI) issued its draft on the subject in double-quick time. In August, State Bank of India (SBI) chairman C S Setty had lifted the veil on a subject long spoken of in corporate corridors: why can’t our banks finance M&As? And that the Indian Banks’ Association (of which Setty is the chairman) is to “make a formal request” to Mint Road to make way for it. Two months down the line, the draft was issued for feedback. Things are surely changing fast.

 

Out with the old 

A far-reaching reform measure that has not got the attention it merits is Mint Road’s setting up of the Regulatory Review Cell (RRC). The cell will be housed in the Department of Regulation (effective October 1, 2025). Its mandate: to ensure that regulations are subject to a comprehensive and systematic internal review every five to seven years. It tells you that Mint Road has taken a long-term view – that such an exercise cannot be episodic in a fast-changing financial world, with technology altering business models. A future where both regulated entities and the regulator will be on a steep learning curve. A closer reading of its membership tells you the scope of its coverage – not just banks (be they state-run, private or small finance banks), but also non-banking financial companies and cooperative banks.

 

A criticism frequently directed at Mint Road is that its consultative process comes across as perfunctory. Drafts issued for industry feedback and the operational circulars that follow are more or less the same. The regulator appears to have taken this sensitivity into consideration. So, to strengthen stakeholder engagement in the regulatory process and leverage industry expertise on a continued basis, an independent Advisory Group on Regulation has been formed concurrently, comprising external experts, to channel industry feedback into the periodic review of regulations through the RRC.

 

It also tells you that RBI governor Sanjay Malhotra (and his key aides) is ensuring that the regulatory reform momentum set in motion by his predecessor is not squandered. Governor Shaktikanta Das had set up the second Regulation Review Authority (RRA 2.0) in November 2021 and gave its recommendations in June 2022. This came two decades after Y V Reddy, as deputy governor, set up the first RRA in 1999 (he was appointed governor on September 6, 2003, and served in that position for five years).

 

Taking fresh cover 

The RBI’s Central Board of Directors has approved the risk-based deposit insurance framework for banks at its 620th meeting. This marks a significant shift in the post-reform period – think of it as tightening the screws on banks’ liability side. Premiums paid by banks to the Deposit Insurance and Credit Guarantee Corporation (DICGC) to secure deposits will be linked to their risk profile. It is not that weaker-rated banks will pay more than the current uniform premium of 12 paise for every ₹100 of deposits. But this will be the cap, and better-rated banks will pay less.

 

What is lesser known is that this architecture – radical as it may appear – is not a new concept. It was flagged by the Jagdish Capoor Working Group on Reforms in Deposit Insurance in 1999; the Committee on Credit Risk Model, 2006, set up by the DICGC; and the Jasbir Singh Committee on Differential Premium System for Banks, 2015. Incidentally, the Singh committee was set up after the issue of risk-based premiums was discussed at the RBI board meeting held on October 16, 2014. It was felt that the DICGC could “explore the possibility of putting in place a differential premium within the cooperative sector linking it to the governance and risk profile of co-operative banks”.

 

The mess at the Mumbai-based New India Cooperative Bank in early 2025 put the spotlight on deposit insurance. M Nagaraju, secretary, Department of Financial Services, had also said that a hike in the sum covered is under consideration. This is speculated to be ₹15 lakh from the current ₹5 lakh.

 

It again tells you that course corrections cannot be episodic – Mint Road is taking longer-term positions with periodic reviews. As M Rajeshwar Rao, former deputy governor, RBI, noted (August 19, 2024), a growing and formalising economy can naturally be expected to see a sharp increase in both primary and secondary bank deposits, “driving a wedge between the desirable insurance reserve requirement and the available reserve”. And considering multiple factors such as growth in the value of bank deposits, economic growth rate, inflation and increase in income levels, “a periodical upward revision of this limit may be warranted”.

 

If an upward revision in the sum covered were to come through down the line, it would be the quickest in the post-reform period. After 1993, it has moved northwards only once (in February 2020), compared with four times between 1968 (the first hike) and 1980. The DICGC was set up in 1962.

 

New UCB licences 

The urban cooperative bank (UCB) space was in the spotlight. After a two-decade break, new UCB licences are to be issued. The health of this sector has improved sharply. The number of UCBs surged in the 1990s on the back of a liberal licensing policy. Over the years, nearly a third of the newly licensed lot became financially unsound. Starting FY04, the RBI initiated a process of consolidation, including the amalgamation of unviable UCBs with viable counterparts, closure of non-viable entities and suspension of the issuance of new licences. As a result, the number of UCBs fell to 1,472 in FY24 from 1,926 in FY04.

 

The move to license new UCBs is also a key step towards realising the ‘Delhi Declaration 2025’ (adopted in November) at the international conference ‘Co-Op Kumbh 2025’, organised by the National Federation of UCBs and Credit Societies, which is to serve as a roadmap for the expansion of UCBs. Within the next five years, a UCB is to be established in every city with a population of over two lakh. Union home minister and minister of cooperation Amit Shah said that UCBs must carry out their core functions with a multi-sector approach for the empowerment of young entrepreneurs, self-help groups and weaker sections of society. The goal is to strengthen cooperatives and, at the same time, strengthen weaker sections.