RBI Policy Signals New Era for Indian Banks and Market-Driven Regulation

 

The latest RBI policy goes beyond conventional monetary adjustments, introducing significant reforms that reduce outdated restrictions on banks and shift supervision toward market-based regulation. This move continues the direction set in June, when the central bank lowered the cash reserve ratio from 4 per cent to 3 per cent.

 

A key feature of the policy is the decision to allow banks to finance corporate acquisitions. For over two decades, banks were restricted from funding acquisitions to ensure that Indian savings and capital were directed toward creating new capacity rather than supporting takeovers. With Indian capital markets now providing ample growth capital through IPOs, the RBI appears to be giving banks greater flexibility to pursue diverse growth opportunities.

 

SBI Chairman CS Setty reportedly made a strong appeal to the RBI governor last month, urging the central bank to permit acquisition financing. Following the policy announcement, Mr. Setty described this move as one of the most significant among the dozen steps introduced to enhance the freedom of banks. Analysts predict that sectors such as cement, textiles, FMCGs, and consumer goods, where productive capacity is scattered across smaller entities, may see an uptick in consolidation activity.

 

Beyond acquisitions, the RBI has proposed removing a 2016 rule that capped the exposure of large corporate groups to banks at Rs 10,000 crore. This ceiling had been introduced after a series of defaults in infrastructure and construction sectors caused non-performing assets to surge between 2013 and 2018. Eliminating the limit reflects the RBI’s confidence that banks and corporate borrowers are capable of assessing creditworthiness independently, a sign of trust in the improved quality of balance sheets across both sectors.