RBI's Octoberfest: Cheers to new regulations

“Good regulation is not about more rules, but about better rules.” – Andrew Sheng

There was an obvious anticipation in the Banking sector about the October 2025 policy review by Reserve Bank of India (RBI). A slew of regulatory reforms was always on the cards, since RBI has been working on making the banks future ready through setting up external committee of experts as well as focusing on building long term resilience in the banking sector. From the phased rollout of the Expected Credit Loss (ECL) model to updated Basel III capital norms and a host of structural reforms, the RBI has laid out a forward-looking blueprint to bolster the strength, competitiveness, and global alignment of Indian banks.

ECL framework: A shift toward forward-looking risk management

In a significant departure from the traditional incurred loss model, the RBI has proposed the adoption of the Expected Credit Loss (ECL) framework for provisioning. This shift, applicable to Scheduled Commercial Banks (excluding SFBs, Payments Banks, and RRBs) and All India Financial Institutions, is designed to bring Indian banking practices in line with global standards. It is to be noted that Banks in India, until now, had been preparing pro-forma ECL provision statements. The new guidelines are expected to bring more analytical approach towards provisioning and greater governance towards underlying modeling frameworks, more aligned to global standards like US FED’s SR 11-7 or UK PRA’s SS1/23. The draft guidelines are expected to be released shortly. Implementation timeline will begin in April 2027, with a glide path extending to March 2031.

Basel III revisions: Aligning capital norms with global standards

Alongside the ECL rollout, the RBI has announced the implementation of revised Basel III capital adequacy norms. One of the major shifts would be towards introduction of Standardised Approach for Credit Risk, aligned towards more granular and risk-sensitive capital requirements. Notably, the revised norms propose lower risk weights for MSMEs and residential real estate, including home loans – potentially freeing up capital for growth. Minimum Capital Requirement for Operational Risk (OR), already in place, is aimed towards moving capital requirements in line with bank’s historical loss data through Standardised Approach (SA) of Basel III.

Beyond ECL & Basel III: A broader push for resilience

The RBI’s October policy goes beyond accounting and capital adequacy. It introduces a series of measures aimed at reinforcing the financial system’s resilience and enabling banks to better support economic growth.

Risk-based deposit insurance premium

The Deposit Insurance and Credit Guarantee Corporation (DICGC) will transition to a risk-based premium model. This move rewards sound risk management by allowing well-capitalised banks to pay lower premiums, replacing the current flat-rate system.

Capital market lending liberalisation

In a notable shift, banks will now be permitted to finance corporate acquisitions. Lending limits against shares and IPOs have been significantly raised, and the regulatory ceiling on lending against listed debt securities has been removed – steps that could deepen capital markets and enhance credit access.

Withdrawal of 2016 framework for large borrowers

The RBI has proposed withdrawing the 2016 framework that discouraged bank lending to large corporates. Instead, systemic concentration risks will be managed through macroprudential tools under the Large Exposure Framework.

Strategic implications for banks

It is common practice to consider regulatory guidelines as compliance checkboxes. However, the current reforms offer an opportunity to the banks for a strategic pivot:

Precision in risk pricing

New ECL and Basel norms, if implemented in right spirit, will enable banks to assess and price credit risk more accurately, which will eventually lead to more sustainable lending practices.
Improved asset quality monitoring

The ECL framework compels banks to continuously monitor asset performance and adjust provisions dynamically. This not only enhances early detection of stress but also reduces the lag between risk recognition and response – ultimately improving asset quality and portfolio resilience.
Cost optimisation across the credit lifecycle

From smarter underwriting to early warning systems and collection analytics, the reforms encourage banks to streamline operations and reduce inefficiencies.
Data-Driven decision making

The emphasis on predictive modeling and risk sensitivity will push banks to invest in analytics, enabling smarter resource allocation and capital optimisation.
Enhanced stakeholder confidence

Transparent provisioning and robust capital buffers will strengthen trust among investors, depositors, and regulators.
Last-Mile credit expansion

Lower risk weights for MSMEs and residential real estate can unlock capital for underserved segments, improving financial inclusion without compromising stability.

That said, the transition will not be seamless. It will require smart investment in internal systems, governance frameworks, and risk culture. For mid-sized and smaller banks, the challenge will be enhancing capabilities while maintaining profitability. The glide path offered by the RBI provides some breathing room, but the strategic imperative is clear: those who prepare early will emerge as leaders in the next phase of banking evolution.

Conclusion

A blueprint for banking transformation

The RBI’s October policy emphasizes its commitment to a stable, alignment with international best practices, and a future-ready Indian banking system. It is quite evident that the regulatory roadmap will shape the banking sector’s trajectory as we advance towards the vision of Viksit Bharat 2047 and a $5-trillion economy. The message from the regulator is crystal clear – it is time to invest in resilience, proactive risk management, and structural robustness. Former Federal Reserve chair Paul Volcker once said, “Regulation is not a substitute for market discipline, but it is a necessary complement.”

This, I believe, captures the essence of the RBI’s approach – strengthening the regulatory framework not to stifle innovation or risk-taking, but to ensure that the foundations of the financial system remain robust and credible.

A version of this article was published on October 14, 2025 by The Economic Times. The same can be read here