Does RBI’s Bold Credit Push Risk Outrunning India’s Safeguards?
It is perhaps the biggest reform in the credit segment since the 1989 abolition of the Credit Authorisation Scheme.
The monetary policy announced recently was less of a monetary policy and more of a credit policy. Quite understandable, as much of the liquidity released in tranches through the previous monetary policy, via cash reserve ratio (CRR) reduction and the front-loaded rate cut, has yet to take its full effect.
Just as the extent of cuts was unexpected in the last policy, the measures announced to ease credit in this policy too were unexpected — as many as 22 — and the markets are still absorbing them. The regulator moved faster than expected in releasing the draft details of the measures soon after the policy announcement.
It is perhaps the biggest reform in the credit segment since the 1989 abolition of the Credit Authorisation Scheme — a scheme introduced in 1965 that required the Reserve Bank of India’s prior approval for all loans exceeding Rs 1 crore.
There were other restrictive regulations as well, which have all been proposed to be ‘repealed’ in one go. Abolition of such antiquated regulations was undoubtedly the most required regulatory requirement for India’s dream of becoming the global manufacturing hub and Viksit Bharat, a little over two decades from now.
Looking back
But let’s look back a little. In the notification issued in 2016 to address the concentration risk to a single counterparty, the RBI had said, the guidelines disincentivise “large and highly leveraged borrowers for their incremental funding from the banking system beyond a threshold”. The guidelines also intended to encourage these borrowers to explore market-based resources for meeting their incremental financing needs.
The words carried wisdom from the past. Since then, banks have been lending to corporates largely for working capital and rightly so as banks' funding depends on savings and current deposits, which are typically callable anytime and therefore considered short term. Agreed that banks today have much stronger balance sheets and can take higher risks. But traditional wisdom says when the going is good, banks should make higher provisions and make their balance sheet stronger. Besides, are there enough safeguards to prevent them from exposing themselves to a single large borrower or even a few of them? Is their balance sheet large enough to fund huge capex?
India’s manufacturing sector currently contributes 17% to GDP. The contribution must grow to 25% if India has to be the manufacturing hub for the world. This requires 15% annual growth, and that requires huge investments. The question is, why are we nudging them to get back to banks for their large funding requirements?
Capex the world over is funded by internal accruals, savings by owners of businesses, equity and debt offerings, venture capitalists and private credit, which are well equipped to take and carry risk. Bank loans typically fund the gaps, if any. The total unshackling of the regulations on funding — both in domestic as well as forex — is like suddenly releasing the water so far controlled by the walls of a dam. And liquidity that the Reserve Bank has created with CRR reduction is significantly high, awaiting pick up from productive sectors.
Deposit Insurance
Introduction of the concept of risk-based deposit insurance is interesting. It was also in suggestion mode for some time now, but was not favoured. The reason behind this was the need for cross-subsidy. In any case, in the present form, deposit insurance fully protects almost 98% of accounts but only 41.5% of deposits.
Of the total 1982 banks covered under the DICGC Act, 1843 are cooperative banks, which are prone to failures by their sheer nature and also have small deposits. The cross-subsidy, which the stronger banks have long been objecting to, is more to protect the small depositors than to unscrupulous banks. In making the weaker banks pay more towards insuring their deposits will punish the small depositors, as invariably the increased burden will get passed on, sooner or later, to the depositors.
The counterargument for the discussion paper on licensing new urban cooperative banks has the same ground. The majority of failures funded by DICGC have been in the cooperative sector. For politicians, setting up a cooperative bank has been a popular ploy to benefit themselves rather than reach the last-mile saver and borrower. The sector has been a can of worms delicately kept closed so far. Opening it at this stage is no service to the small saver who is not discerning enough to differentiate between a weak bank and a strong bank, a bank owned by the government and a bank owned by shareholders. Is she ready to bear the risk of losing all her life’s savings?
Stock Market Investments
The SEBI investor survey 2025 has revealed that while 63% of the households are aware of investments, only 9.5% of the households put money in market products. People don’t invest because they feel markets are too complex. They also fear loss of money and lack of trust in products or institutions. The survey results reiterate the fact that while there is a huge scope for bringing depth to the stock markets and distributing wealth more evenly, it is equally necessary to build in enough safeguards for the small investors who can then invest without much fear in the stock markets. The enhanced limits for IPO investments and loans against shares thus seem to be more for large investors and not for small investors.
What Then?
Not that the measures announced are not required. India cannot be where it dreams to be in the next two decades without such bold leaps. The point is, these risk-based measures to succeed need mature markets. Do we have them? Have we put in place adequate guardrails so that banks do not go overboard, risking the depositors’ money?
The ECL framework becomes fully operational only by 2031, whereas the unshackling of lending happens as early as from April 2026. Will our banks self-govern and lend wisely? How many honest businessmen do we have who will use the money wisely and for business growth? Do we have a discerning public that can differentiate between safe and risky investments? And lastly, do we have social security to protect that small saver who thinks the money saved in a bank is safe? Maybe the RBI could have tried further strengthening the banks further with corporate governance and self-regulation firmly in place before allowing them a free hand to lend. If this means pushing the Viksit Bharat dream to 2050, so be it!
