RBI Governor Sanjay Malhotra: Indian Banks Stronger, Easing Capital Market & Acquisition Funding Norms

Reserve Bank of India Governor Sanjay Malhotra highlighted the substantial strengthening of Indian banks and increased economic resilience over the past decade. He stated that these improvements have empowered the Reserve Bank of India (RBI) to remove various restrictions, granting banks greater latitude in engaging with capital market risks and financing new ventures, including acquisitions.

The RBI has introduced a set of calibrated reforms aimed at fortifying financial stability while simultaneously fostering innovation. These include proposed updates to 1999 lending norms, raising limits on loans secured by securities, and rationalizing lending to financial intermediaries. A new loan-to-value (LTV) framework has been proposed, linking exposure levels to the riskiness of the underlying asset. Additionally, listed, investment-grade debt will now be eligible as collateral, which is expected to deepen the bond market.

Banks will be permitted to fund acquisitions under strict limits, aligning their practices with Non-Banking Financial Companies (NBFCs) and bond market conventions. Malhotra emphasized that acquisition finance is a vital component of a developed financial system for better resource allocation.

These banking reforms were announced by the RBI in its Oct 2025 monetary policy. The bold reforms are seen as measures to counter global uncertainties like US tariffs and sanctions. Malhotra justified the RBI's approach, using a Shakespeare quote to emphasize that safety often comes from taking calculated risks.

He assured that sufficient guardrails are in place, such as permitting External Commercial Borrowings (ECBs) for real estate only for FDI-compliant projects and prohibiting them for speculative activities.

With stronger bank balance sheets, the specific borrower framework from 2016 has been replaced by risk-based monitoring. Malhotra highlighted the economy's resilience, attracting investment amidst global slowdowns. He cited statistics: credit and deposits have nearly tripled, and capital adequacy ratios have improved significantly (CRAR up by about 4%, CET1 up by 3.4% from 2015 to 2025).

Impact: These reforms are poised to inject dynamism into the Indian financial sector. By allowing increased capital market exposure and acquisition funding, banks may engage more actively in corporate finance and investment activities. This could lead to enhanced lending, facilitate mergers and acquisitions, and deepen the bond market, potentially boosting the performance of banking and financial services stocks. The focus on risk-based monitoring and robust capital buffers signals a mature regulatory approach, underpinning investor confidence in the financial system's stability. Impact Rating: 8/10.

Heading: Difficult Terms and Meanings

ECB (External Commercial Borrowings): Loans raised by Indian entities from non-resident entities, typically for business purposes. LTV (Loan-to-Value): A ratio used by lenders to assess the risk of a loan, calculated by dividing the loan amount by the appraised value of the asset being purchased. A lower LTV indicates less risk for the lender. NBFCs (Non-Banking Financial Companies): Financial institutions that provide banking-like services but do not hold a banking license. FDI (Foreign Direct Investment): An investment made by a company or individual in one country into business interests located in another country. CRAR (Capital to Risk-weighted Assets Ratio): A measure of a bank's capital adequacy, ensuring it holds sufficient capital to absorb potential losses. CET1 (Common Equity Tier 1): The highest quality form of bank capital, consisting of common stock and retained earnings.