RBI Unveils Banking Reforms Amidst Stronger Indian Economy

MUMBAI: The Reserve Bank of India (RBI) has announced a series of banking reforms designed to bolster financial stability and encourage innovation within the sector, according to RBI Governor Sanjay Malhotra. He noted that Indian banks have significantly strengthened over the past decade, coupled with a more resilient economy, which has allowed the central bank to relax several restrictions on capital market exposure.

Malhotra stated that foreign capital inflows, particularly through External Commercial Borrowings (ECB) and deposits, are expected to remain robust throughout the remainder of the year. The proposed reforms include updates to capital market exposure norms that were established in 1999, which will raise the limits on loans secured against securities and streamline lending processes for intermediaries.

A revised loan-to-value framework will now link exposure to the risk associated with the underlying assets. Additionally, listed, investment-grade debt will be recognized as acceptable collateral, thereby enhancing the bond market's depth. The new regulations will also permit banks to finance acquisitions, subject to stringent limits, aligning their operations more closely with Non-Banking Financial Companies (NBFCs) and the bond market.

These reforms were originally introduced during the RBI’s monetary policy announcement in October 2025. Malhotra emphasised that the measures were a proactive response to global uncertainties, including tariffs and sanctions imposed by the United States. He quoted William Shakespeare to illustrate the importance of taking calculated risks while ensuring safety: "’Tis dangerous to take a cold, to sleep, to drink; but out of this nettle, danger, we pluck this flower, safety!"

According to Malhotra, Indian banks have matured significantly over recent years, with credit and deposits expanding nearly threefold. He highlighted improvements in capital buffers, noting that the Capital to Risk-Weighted Assets Ratio (CRAR) has risen by approximately 4% between 2015 and 2025. Furthermore, the Common Equity Tier 1 (CET1) ratio has increased from 10.43% to 14.73%, a rise of 3.4%. He reported a decline in the Gross Non-Performing Assets (GNPA) and Net Performing Assets (NPA), alongside increased profitability and improved returns on assets and equity.

Malhotra pointed out that the framework governing bank operations was established in a markedly different financial landscape when banks were struggling with losses. He noted that the Tier 1 capital of the banking sector has surged from roughly Rs 8 lakh crore to Rs 26 lakh crore, more than tripling in size.

The new risk weights for infrastructure lending by NBFCs will be determined based on repayment performance. The RBI has also eased the external borrowing regime by removing cost caps and expanding eligibility for lenders, although speculative real estate investments will continue to be restricted.

The RBI's approach, which Malhotra referred to as "responsive conservatism," aims to achieve a balanced reform strategy that incorporates prudence, early recognition of stress, enhanced consumer protection, and transparent regulation. He urged banks and financial institutions to embrace innovation while maintaining a sense of responsibility, emphasising that sound judgment from boards and management is crucial. He called on bank leaders to apply the new measures faithfully while improving the grievance redress mechanism through regular reviews and analyses of root causes.