RBI Monetary Policy Update: Enhancing Financial Stability for Banks and NBFCs
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Introduction
In his statement on the Monetary Policy, the RBI Governor highlighted that banks and NBFCs continue to exhibit financial stability, by way of strong liquidity positions, capital adequacy, and sustained profitability. NBFCs have shown improvement with better asset quality and declining GNPA ratios. Against this backdrop, the RBI today maintained a cautious yet forward-looking stance, keeping policy rates unchanged while focusing on strengthening financial stability, enhancing risk management, and reinforcing consumer protection through regulatory measures affecting banks and NBFCs.Some of the policy changes introduced by the RBI, which are expected to impact financial entities such as banks and NBFCs, are as follows:
Key Highlights:
| Particular | Change and Impact |
| Expected Credit Loss (ECL) Framework | Applicability: Banks Impact/Change: RBI plans to implement an ECL-based provisioning framework for banks, effective from April 2027. Under this framework, banks will be required to make provisions upfront for potential losses based on expected credit deterioration, in alignment with that of NBFCs under IndAS. The ECL approach is intended to strengthen credit risk management and promote more forward-looking provisioning practices. You can read our analysis on the same here. |
| Basel III Guidelines – Standardised Approach | Applicability: Scheduled Commercial Bank excluding Small Finance Banks, Payments Banks, and Regional Rural Banks; Impact/Change: RBI has proposed draft guidelines on the Revised Basel Framework – Standardised Approach for Credit Risk. Accordingly the approach for arriving at risk weight for computation of capital ratios. While guidelines are awaited, IIRB approach may be introduced for Indian Banks, in line with global practices. |
| Risk-Based Premium Framework for Deposit Insurance | Applicability : Banks Impact/Change: At present, the Deposit Insurance and Credit Guarantee Corporation (DICGC),, operates the deposit insurance scheme where each depositor in a bank is insured up to a maximum of Rs 5,00,000. currently DIGC levies a uniform flat premium of 12 paise per ₹100 of deposits from all banks, irrespective of how financially strong or weak a bank is. The RBI has now proposed a shift to a Risk-Based Premium Framework. |
| Risk Weights on Infrastructure Lending by NBFCs | Applicability: NBFCs in project finance, HFCs with LAP exposure, and banks with large infrastructure portfolios Impact/Change: “Infrastructure lending” (para 5.1.14, SBR Master Directions) refers to credit extended by way of term loans, project loans, or investment in bonds/debentures/preference/equity shares of a project company, where the subscription is treated as an advance or other long-term funded facility in the sub-sectors as may be notified by the Ministry of Finance Under the SBR, provisioning norms did not differentiate between construction and operational phases, overlooking the higher risks during construction. The Project Finance Directions, 2025 addressed this by mandating higher provisioning for under-construction projects. Presently, NBFCs can apply lower risk weights to operational PPP projects (50% for operating vs. 100% for construction). RBI now proposes a principle-based framework to better align risk weights with the actual risk profile of operational projects. Guidelines are awaited. |
| Review of the External Commercial Borrowing Framework | RBI has proposed a review of the External Commercial Borrowing (ECB) framework to rationalise and simplify existing regulations. The proposed changes include Expanding eligible borrower and lender categories,Relaxing borrowing limits and maturity restrictions,Removing cost ceilings, revising end-use conditions,Simplifying reporting requirements. Draft regulations are yet to be issued for the same. |
| Strengthening the Internal Ombudsman (IO) Mechanism | Applicability: NBFCs-NDs with an asset size of Rs. 5000 crore and above, and having public customer interface;Deposit-taking NBFCs with 10 or more branches. Impact/Change: The RBI intends to enhance the effectiveness of the IO framework introduced for the REs in 2018, and later, a revised direction was introduced in 2023. As per the extant regulatory requirements, the IO serves as an independent authority within the applicable REs to review complaints that are rejected by the REs. The proposed revisions seek to strengthen this mechanism by: Empowering IOs with compensation powers and granting them the ability to directly interact with complainants, thereby aligning their role more closely with that of the RBI Ombudsman. Introducing a two-tier grievance redress structure within applicable REs, to ensure that complaints are first addressed at multiple levels internally before being escalated to the IO. The draft of the revised master direction on the internal ombudsman is yet to be released, which will then be open for wider analysis of the changes and their implication. |
| Review of Reserve Bank – Integrated Ombudsman Scheme, 2021 | Applicability: Banks and NBFCs in Base, Middle and Upper Layers Impact/Change: The RBI has conducted a comprehensive review of the RBI – Integrated Ombudsman Scheme, and will be releasing the draft of the revised Scheme for stakeholder feedback. The revision of the scheme is related to the following: To extend its applicability to State Co-operative Banks and District Central Cooperative Banks (previously under NABARD), thereby the customers of these rural co-operative banks can now approach the RBI Ombudsman for complaints related to banking services instead of NABARD. To enhance clarity, simplify procedures and reduce timelines to ensure more effective handling of complaints. Considering the publications, there is expectation of cross reporting between RBI Ombudsman and Internal Ombudsman. |
| Consolidation of Regulatory Instructions | RBI is streamlining and consolidating its regulatory instructions into Master Directions for easier access and compliance. Around 250 draft Master Directions, covering 30 regulatory areas across 11 types of regulated entities, will be published on the RBI website, and stakeholders will be given an opportunity to review them and give feedback on their completeness and accuracy. |
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