Responsive regulations for resilience

Regulations are never cast in stone, evolution is essential

While speaking at a recent conclave, the Reserve Bank of India governor emphasised that “no regulatory measure can be understood in isolation. Each measure has to be seen in the continuum of regulatory evolution and not in isolation”. His remarks perhaps were prompted by the public commentary that followed a series of proposals announced by the RBI recently.  

Many have welcomed these announcements; some have said it is “big, bold, courageous”. Others have cautioned that they may be “sowing the seeds of the next AQR [asset quality review]”. I believe both descriptions miss the point.  

What is really happening is something subtler, but more important: India’s financial sector regulations are being calibrated to align with a banking system and an economy that look very different from a decade ago. 

 

Regulations are written at a point in time. However, markets, technology, and risks keep evolving. If rules that were written for a stressed banking system in 2015 are applied unchanged to a much stronger system in 2025, it is not prudence. Instead, it may be termed as regulatory inertia. Therefore, the recent measures need to be seen in the larger context of regulatory evolution, and not as regulatory exuberance.  

A continuum, not awakening 

Since the constitution of the Regulations Review Authority 2.0 (RRA 2.0) in 2021, the RBI has been pruning redundant instructions in phases. RRA 2.0 recommendations have already led to the withdrawal of over 1,000 circulars, as well as rationalisation and streamlining of returns.  

The latest consolidation drive goes further, folding approximately 3,500 directions, circulars, and guidelines, into about 244 consolidated Master Directions across 11 categories of regulated entities, while repealing redundant instructions.

Rationalisation of returns, withdrawal of redundant circulars, and a push towards consolidation, are all part of a sustained effort to make regulation responsive — stricter where it matters and simpler where it does not. 

Why the “next AQR” fear is misplaced 

Maybe there is anxiety in some quarters that, by allowing banks more room in areas such as acquisition finance and capital market lending, the RBI is sowing the seeds of avoidable risk build-up, bringing back memories of the AQR of 2015. However, that AQR took place against the backdrop of highly leveraged corporations, and their heavy concentration in bank books. 

Today’s starting point is different. System-wide capital ratios have risen to about 17.5 per cent in 2025, while gross non-performing assets (NPAs) have dropped to a little over 2 per cent, and net NPAs to around half a per cent. Profitability has swung from losses to healthy returns. Corporations have deleveraged their balance sheets and diversified their funding sources. 

Supervision has also come a long way since then. Risk-based supervision has stabilised, off-site monitoring is richer and more data-driven, and a system-driven income recognition and asset classification is firmly in place. Stress tests are more rigorous, and macroprudential tools such as counter-cyclical risk weights are selectively, but effectively, used to cool pockets of risk. 

Moreover, the new freedoms proposed are hedged with prudential guardrails. Illustratively, easing of limits on lending against securities is proposed to be accompanied by prudently calibrated LTV (loan-to-value) norms and eligibility criteria. Bank financing of acquisitions is capped relative to deal size and bank capital, with attention to debt-equity mix and concentration risk.  

Boards move to the frontline 

A less discussed but equally important shift is governance. Over the last couple of years, the RBI has engaged more directly and intensively with boards and senior management to ensure that regulations are implemented in both letter and spirit, and that business ambitions do not outrun risk capacity. 

The latest announcements fit this arc. Implementing the expected credit loss framework will require banks to build robust internal models, strengthen credit risk management, and make forward-looking judgements with informed board oversight. Risk-based premium for deposit insurance will sharpen board incentives to strengthen balance sheets and risk controls. 

On the customer side, empowering Internal Ombudsmen and tightening the RBI’s own grievance redress scheme sends a clear message that good conduct is not optional and first-line responsibility lies with those who approve products, sanction loans, and sign off on risk frameworks. 

Why this matters for growth 

For the real economy, there are several benefits from this re-calibration. Better provisioning and capital rules improve the resilience of the banks to shocks, allowing them to keep lending through the cycle.  

Revised capital market exposure norms and a more flexible external commercial borrowing regime can give corporations more avenues for fundraising, especially in a world where domestic investment needs are substantial and global capital is mobile.

New project finance regulations and rationalising risk weights for infrastructure lending by non-banking financial companies (NBFCs) should improve the flow of long-term capital to operational projects that genuinely deserve lower capital charges, without subsidising riskier exposures. 

A living rulebook 

In public debate, it is tempting to take each new circular or line of a speech in isolation and pronounce it either too harsh or too lenient.  

That is like judging a thali by a single grain of rice, ignoring the poriyal, kootu, vadai, sambar, rasam, and, of course, the payasam that together define the experience. In a lighter vein, one could say: The servings are liberal, but each board is expected to consume responsibly, in line with its own (risk) appetite! 

Regulation must be seen as a comprehensive system: Minimum capital requirements, lending limits, provisioning norms, governance standards, consumer protection, resolution tools, and supervisory responses all reinforce one another. 

India’s experience with past crises suggests that its financial system, while not flawless, has shown a capacity to bend without breaking. Each episode has left behind a deeper layer of institutional memory in financial institutions and at Mint Street. The current set of measures is, therefore, better read as the outcome of those learnings rather than a sudden change of stance. 

Ultimately, if India is to become a developed economy by 2047, it will need a financial system that is both larger and safer to support the real sector. This requires regulation, which is prudent yet responsive, principled yet practical. In other words, a rulebook that keeps learning. The hallmark of good regulation is not that it never changes, but that it knows when and how to evolve. 

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The author is  Deputy Governor, Reserve Bank of India. The views are personal