India's banking regulation rejig: A few proposals require tweaks

Some of the changes proposed in banking regulation last month might need to be tweaked for the sake of systemic stability

- INDIRA RAJARAMAN

The monetary policy announcement of 1 October 2025 was noteworthy for the changes to India's banking regulation rules proposed by the Reserve Bank of India (RBI), more than for the formal decision of the monetary policy committee (MPC) to leave the repo rate unchanged.

There was, of course, a separate and very detailed Monetary Policy Report, a statutory obligation of the MPC at the midpoint of a fiscal year.

The RBI governor's public address after each bimonthly MPC meeting usually deals also with banking regulation and financial market issues, which do not fall within the jurisdiction of the MPC. This time, however, the regulatory component dominated the address, with 22 new initiatives announced to strengthen provisioning by banks against loss, align capital adequacy norms with the revised Basel III guidelines, revise norms for credit risk weights, and announce the final version of the draft circular issued in October 2024 on prudential regulation of "forms of business."

Starting with the last, the October 2024 draft stipulated "no overlap in the lending activities undertaken by the bank and its group entities" (Item No. 4(a)iii in the Annex to the draft circular). This restriction is proposed to be removed in the final guidelines, as stated at the MPC announcement, on the grounds that the strategic allocation of business streams among group entities is best left to the wisdom of bank boards. The 'no overlap' stipulation is actually quite sensible from a ringfencing perspective, and does not prima facie intrude on the jurisdictional latitude of bank boards.