On October 1, 2025, both the Bank Nifty and Fin Nifty indices experienced significant gains, driven by the Reserve Bank of India's (RBI) proposals concerning lending and capital rules. The Bank Nifty soared by over 700 points, while the Fin Nifty rose by 1.2%. These positive movements reflect investor confidence in the measures taken by the RBI to strengthen the banking system and improve credit flow.
Key Proposals by the RBI
The RBI introduced several key proposals aimed at boosting the banking sector:
- Expected Credit Loss (ECL) Framework: The implementation of the ECL framework, which requires banks to set aside more funds for potential loan losses, will be effective from April 1, 2027. Banks will have until March 31, 2031, to fully implement this framework. This phased approach is designed to mitigate the impact on banks' existing books.
- Revised Basel III Capital Norms: The RBI plans to implement revised Basel III capital adequacy norms for commercial banks from April 2027. These norms include lower risk weights for certain sectors, such as MSMEs and residential real estate, including home loans, which are expected to reduce overall capital requirements.
- Risk-Based Deposit Insurance Premium: The RBI proposed a shift from the current flat-rate deposit insurance premium to a risk-based system. This means that better-rated banks will pay lower premiums, incentivizing sound risk management and strengthening overall financial stability.
- Flexibility in Lending: The RBI has allowed greater flexibility to banks for opening and maintaining accounts of borrowers. It has also removed the ceiling on lending against listed debt securities and increased the limit for lending against equity shares from ₹20 lakh to ₹1 crore per person. Additionally, the cap on bank financing for IPOs has been raised from ₹10 lakh to ₹25 lakh per individual.
- Financing Acquisitions: The RBI has proposed to expand the scope of capital market lending by banks, including financing acquisitions by Indian corporations. This move is intended to provide an enabling framework for corporate acquisitions.
- Withdrawal of 2016 Framework: The central bank proposed to withdraw a 2016 framework that limited bank lending to large corporations, in a bid to reduce the risk of concentrated lending.
- Reduced Risk Weights for Infrastructure Loans: The RBI has lowered the risk weights for NBFC lending to operational, high-quality infrastructure projects. This is expected to reduce the cost of financing for the infrastructure sector.
- Removal of Restrictions on Overlap in Businesses: The proposed restriction on overlap in business between a bank and its group entities has been removed, leaving strategic allocation of business streams to bank boards.
Market Reaction and Analysis
The RBI's announcements were made alongside the key decisions of the Monetary Policy Committee (MPC), which kept the repo rate unchanged at 5.5% and retained a neutral stance. Following these announcements, the Nifty Bank index traded with strong gains. Major bank stocks, including ICICI Bank, HDFC Bank, and Axis Bank, rose between 2% and 2.5%. HDB Financial also gained nearly 3% after regulatory restrictions were eased. Shares of non-banking finance companies (NBFCs) such as HUDCO, IREDA, PFC, and REC also rose.
Impact and Outlook
The RBI's measures are expected to have a positive impact on the banking sector, with better capital efficiency, higher credit flow, and a potential rise in profitability. The easing of regulations and improved credit accessibility are expected to set the stage for a more robust and growth-oriented banking system in the coming months. The positive market sentiment indicates that investors are confident in improved lending conditions, lower costs, and regulatory clarity. These reforms align the regulatory framework with international standards and strengthen capital adequacy for banks and financial institutions.
