What Prompted RBI To Change Banking Rules?

The Reserve Bank of India's 22 new initiatives announced during the monetary policy announcement on Oct. 1 caught most by surprise. While the monetary policy decision was mostly a non-event, Governor Sanjay Malhotra's sweeping changes to banking norms were detailed and well thought out.

Sources told NDTV Profit that these changes were widely discussed over the last few months. According to a person in the know, the regulator's decision to alter the large exposure framework came after banks sought a review.

The large exposure framework, first introduced in 2016, was last materially altered in 2019. Since then, the banking industry has gone through a sea change. The framework was originally brought in to curb excessive leverage in corporate lending, after the banking system was found to be hiding non-performing assets on its balance sheet.

The rules were clear: individual banks would not be able to lend more than 20% of their capital base to a single borrower and in case of a group of borrowers, the limit was at 25%. Those limits will continue to be in force, the person quoted above said. What will change though are the limits imposed on system level exposure to large corporates.

According to the rules, the system could not lend more than Rs 10,000 crore to a single corporate, unless at least 50% of its borrowings were in the form market instruments. To calculate banking sector exposure, all forms of funds extended by banks would be considered, including bank loans from domestic and international branches, and bond investments.

Moreover, if these norms are not followed, banks would be required to make additional provisions on their exposures.

Banks felt that with their cumulative capital base of over Rs 26 lakh crore, the Rs 10,000 crore limit was too restrictive. Additionally, the provisioning requirements were too cumbersome.

"...the restriction placed on the banking system not to exceed Rs 10,000 crore...was kind of archaic in our view," CS Setty, chairman, State Bank of India, told NDTV Profit.

The regulator took cue from these demands and conducted its review, before entirely removing the restrictions, the person quoted above said. During his interview Setty called the regulator's decision a "bold" one.

In his statement, Governor Malhotra said that other macroprudential tools would be implemented to track system level exposure to large borrowers and introduce any other limits which may be found necessary.

Forms Of Business

Another change in stance the regulator announced was with respect to the forms of business of bank-owned non-bank finance companies. In October 2024, the regulator released a draft set of guidelines on the kind of business a bank-owned NBFC could do.

This had however caused considerable confusion in the system, as banks and their NBFCs were to reduce the level of business overlap amongst themselves.

"The proposed regulatory restriction on overlap in the businesses undertaken by a bank and its group entity(ies) is being removed from the final guidelines. The strategic allocation of business streams among group entities will be left to the wisdom of bank boards," Governor Malhotra said on Wednesday.

This decision was also led by a discussion with the banking sector, which detailed that it had enough of a chinese wall with their NBFC to not cause a worry. The regulator had originally made a proposal to limit such overlaps because it was felt that NBFCs may be used to expand on existing businesses. This would defeat the purpose of having two lending businesses under one umbrella, as they would end up being extensions of each other.

According to the person quoted above, banks felt that this could make their NBFCs uncompetitive, as shadow lenders not owned by banks had no real restriction to the kind of business they could enter into.

Leaving it to individual bank boards to decide the nature of business they want to conduct through different lending arms would be the better decision, the person quoted above said. The regulator would continue to monitor businesses and decide on whether the spirit of regulations are being duly followed, the person said.