Regulations have to evolve keeping in mind the realities of time: RBI Guv Malhotra

Reserve Bank of India (RBI) Governor Sanjay Malhotra (file photo)
| Photo Credit:
PTI/SHASHANK PARADE

Indian banks have reached a significantly higher level of maturity compared to ten years ago, said RBI Governor Sanjay Malhotra. He emphasized that evolving regulations must account for substantial growth in credit and deposits, stronger capital reserves, enhanced asset quality, increased profitability, and improved returns on assets and equity.

“Given these transformations, prudential frameworks must adapt proportionally now that banks are more resilient, supervision mechanisms more responsive, and alternative risk-bearing structures more robust,” Malhotra stated during SBI’s 12th Annual Banking and Economics Conclave.

“Recent regulatory steps reflect these foundational shifts reshaping banking and financial systems over the past decade,” he added.

The Governor referenced recent initiatives such as draft guidelines on capital market exposures, acquisition financing rules, and the phased withdrawal of the large borrower framework set for April 2026.

“Deposits and credit have nearly tripled. Capital adequacy has risen by close to 4 percentage points from 2015 to 2025. Asset quality shows marked improvement, with gross and net NPAs declining substantially. Profitability metrics, including return on assets and equity, have surged significantly. This progress necessitates a regulatory evolution aligned with current realities,” Malhotra noted.

He stressed that improved capital strength, asset quality, and profitability demand regulations attuned to present conditions. “While these measures introduce new perspectives, they represent incremental refinements rather than radical overhauls. Each adjustment must be assessed within the broader continuum of regulatory progress,” he clarified.

These reforms collectively establish layered safeguards against systemic vulnerabilities, the Governor explained. Evaluating individual measures without grasping their interconnectedness risks overlooking systemic objectives.

Malhotra highlighted that banks’ enhanced responsibilities stem from demonstrated advancements in governance and decision-making. “Regulators cannot supplant board-level judgments, particularly in a diverse landscape where each financial decision carries unique risks and opportunities. Institutions need flexibility to innovate within prudent boundaries,” he stated.

Where prohibitions have been eased or thresholds adjusted, the RBI has instituted robust guardrails. “Regulatory oversight extends beyond rulemaking—comparable to gardening, it requires nurturing growth while pruning excesses. Tools like risk weights, provisioning norms, and countercyclical buffers remain available for systemic stability,” he observed.

The Governor clarified that most updates are issued as draft regulations pending consultation. “While they signal our directional approach, stakeholder input will shape final policies,” he concluded.

Published on November 7, 2025