Overview of Recent RBI Regulatory Measures
The Reserve Bank of India (RBI) governor emphasized the necessity of viewing regulatory measures within the continuum of regulatory evolution, rather than in isolation. This perspective is critical given the recent proposals by the RBI. These measures aim to align India's financial sector regulations with the evolving banking system and economy.
Regulatory Evolution
Regulations must adapt to changing markets, technology, and risks. Applying outdated rules to a rapidly evolving financial system is not prudent. The recent RBI measures are part of this evolution, aiming to avoid regulatory inertia.
Regulations Review Authority 2.0 (RRA 2.0)
- Since 2021, RRA 2.0 has worked to prune redundant instructions.
- Over 1,000 circulars have been withdrawn.
- The latest drive consolidates approximately 3,500 directions into 244 Master Directions.
- Efforts are focused on making regulation responsive, stricter where necessary, and simpler otherwise.
Reassessing Asset Quality Review (AQR) Concerns
Some fear new measures may lead to risks similar to the AQR of 2015. However, current conditions differ significantly.
- System-wide capital ratios have risen to about 17.5% in 2025.
- Gross non-performing assets (NPAs) have dropped to just over 2%.
- Corporations have deleveraged and diversified funding sources.
- Enhanced supervision includes risk-based and data-driven monitoring.
- Prudential guardrails are proposed alongside new freedoms to mitigate risks.
Enhanced Governance
A shift in governance involves direct engagement with boards and senior management to ensure compliance with regulations.
- Boards are incentivized to strengthen balance sheets and risk controls.
- Empowered Internal Ombudsmen reinforce good conduct and consumer protection.
Impact on Economic Growth
Re-calibrated regulations offer several benefits to the real economy.
- Improved provisioning and capital rules enhance banks’ resilience.
- Revised norms and flexible borrowing regimes facilitate corporate fundraising.
- Project finance regulations aim to improve capital flow to deserving projects.
Comprehensive Regulatory Approach
Regulation should be seen as a comprehensive system, where various components reinforce each other. India's financial system has historically adapted to crises, indicating its resilience and capacity to learn from past experiences.
Conclusion: Towards a Developed Economy
For India to become a developed economy by 2047, it needs a larger and safer financial system, supported by evolving regulations. Good regulation knows when and how to evolve, ensuring that it remains both prudent and responsive.
