Fiscal policy must match banking reality in bad loans

India's economic transformation in the twenty-first century has been catalyzed by bank lending, infrastructure funding, agriculture, and social development.

- MADHAV KANHERE

Credit to micro, medium, and small enterprises has enabled entrepreneurship. Banks have navigated significant global and domestic volatility throughout this period, acting as financial stabilizers amid macroeconomic stress.

The Reserve Bank of India (RBI) has calibrated its regulatory oversight on bank lending through targeted interventions. Its actions include the introduction of prudential norms for income recognition and asset classification in 2004; tighter provisioning requirements for restructured loans after the 2008 global financial crisis; increased provisioning mandates in 2014 to counter systemic stress; adjustments to provisioning logic to align with the Insolvency and Bankruptcy Code, and temporary relaxations during Covid-19. Most recently, it overhauled provisioning norms under the RBI (Project Finance) Directions, 2025, effective October 1.

The new framework introduces a principle-based regime, harmonizes treatment across banks and non-banking financial companies (NBFCs), and reduces provisioning requirements for under-construction projects—from 5 per cent to 1 per cent—to ease funding and enhance regulatory consistency.