Will RBI rethink its policy of banning biz of banks and NBFCs? Seems so, say bankers

Sanjay Malhotra

A banker who spoke to Moneycontrol after the first monetary policy speech delivered by the new Governor, Sanjay Malhotra, said the governor’s approach on regulations gave him a sigh of relief.

He didn’t want to be named not out of the fear of a detrimental action against his bank, but this is the sentiment unanimously echoed by all his colleagues and peers he emphasized.

With large banks like Kotak Mahindra Bank and Federal Bank still reeling under regulatory embargo on certain businesses and the industry widely expected to adopt a few new regulations starting FY26, the commentary from Malhotra is nothing short of comforting. What makes it even more appealing to the banking system was the assurances handed out by him, right at the start of his speech. Addressing the media after the Monetary Policy speech, Malholtra said for banks to comply with liquidity coverage norms, expected credit loss norms and project finance norms may not be possible before March 31, 2026, thereby giving banks about a year to adopt the final norms as and when they become applicable (https://www.moneycontrol.com/news/business/draft-lcr-project-financing-norms-not-to-be-implemented-before-march-2026-12933458.html)

“This gives us the confidence that the regulator is willing to rethink a few proposals,” said a CEO of a bank.

Come FY26, three major circulars issued last calendar year were expected to become reality – on liquidity coverage ratio, expected credit losses and project finance. While not mentioned as part of today’s speech, banks are also awaiting the final decision on investment holding in non-bank businesses. These proposed norms is touted to have a significant impact on the day to day functioning, profits earned and capital position of banks. Not surprisingly then, banks have been lobbying for a deferment of these proposals, which has finally been heard by the regulator. On January 29, Moneycontrol had reported that banks have sought for a deferment in implementation of LCR norms.

“We recognise that just like there are no free lunches, regulation to enhance stability and consumer protection too is not devoid of costs. There are trade-offs between stability and efficiency. We will keep this trade-off in mind while formulating regulations. It will be our attempt to strike the right balance, keeping in view the benefits and costs of each and every regulation,” Malhotra said while commencing his first MPC speech.

“On the regulatory front, I would like to mention, especially in the context of some of the proposed regulatory changes pertaining to liquidity coverage ratio (LCR), expected credit loss (ECL) framework for provisioning by banks, and the prudential norms governing projects under implementation, that we will continue to strengthen, rationalise and refine the prudential and conduct-related regulatory framework in the overall interest of the economy. The interest of the economy demands financial stability and consumer protection. Our mandate is to enhance both of them. At the same time, economic interest also warrants increasing efficiency, which too is our duty,” he added.

Reassuring all stakeholders that the RBI will remain committed to its consultative process in regulation-making, Malhotra added that “the suggestions of stakeholders are valuable and we will give serious consideration to them before taking any major decision”. He also went a step further to comfort the market participants that RBI will ensure that the implementation of such regulations is smooth and sufficient time is given for transition. “Where regulations have major implications, the implementation will be done in a phased manner,” he assured.