Law And Policy

This post consists summary of:
1. Regulatory Disruption: Are Banks And NBFCs Prepared For RBI’s Next Oversight Wave?

2. Financial Regulation and Supervision in India and Japan :Case of Banking Sector. [S.l.] : SSRN. https://ssrn.com/abstract=1960856

3. Evolution of Central Banking in India – Dy. Governor Rakesh Mohan, 2006

4. Financial Regulation and Supervision in India and Japan: Case of Banking Sector – Preet, Sirjjan (2014). 

Summary of the article – “Regulatory Disruption: Are Banks and NBFCs Prepared for RBI’s Next Oversight Wave?” by Aarna Law, published on 25 June 2025.

The article examines how the Reserve Bank of India (RBI) is ramping up a new phase of regulatory oversight across India’s banking and non-banking financial company (NBFC) sectors, and questions whether these institutions are ready for the surge in regulatory expectations. It emphasises that as India pursues ambitious development targets (e.g., becoming a $7 trillion economy), financial institutions must respond not just to traditional prudential rules but also to evolving structural, digital, and risk-governance demands.

Context and shifting landscape
The Indian financial system is anchored on two pillars: banks (regulated under the Banking Regulation Act, 1949) and NBFCs (companies registered under the Companies Act that come under RBI supervision via Chapter III-B of the RBI Act, 1934). These institutions historically complemented each other in extending credit, promoting inclusion and supporting growth. However, recent developments show that the RBI has flagged emerging risks—particularly unsecured consumer credit, large borrower exposures, and latent stress in NBFC funding and credit intermediation. The article notes that gross non-performing assets (GNPAs) in banks have fallen to multi-year lows, yet the central bank is urging caution about build-up of internal vulnerabilities.

Banks: tightening oversight and risk weight pressures
For banks, the RBI’s focus is shifting from mere oversight of existing NPAs to more proactive surveillance of future risk (especially in unsecured lending and large exposures). The article points out that banks are being nudged toward higher risk weights on unsecured loans, more conservative provisioning norms, and closer scrutiny of off-balance sheet exposures (especially those routed through NBFCs). The message is clear: banks will not receive leniency if credit growth outpaces risk management, especially in segments heavily exposed to digital lending and consumer finance.

NBFCs: from light touch to scale-based regulation (SBR)
NBFCs historically enjoyed a lighter regulatory regime than banks, affording them flexibility in niche credit segments (MSMEs, rural finance, consumer lending). The introduction of the SBR (Scale-Based Regulation) framework marks a sea change. Under SBR, NBFCs are categorized into layers (base, middle, upper, top) based on assets, business profile and risk. Upper-layer NBFCs face requirements akin to banks—capital adequacy norms, governance standards, greater disclosures, board structure mandates, and risk management systems. Many NBFCs may not yet be operationally or technologically mature to comply seamlessly. Key risks: funding stress (given heavy reliance on bank borrowings—more than 40% in some cases), interest rate sensitivity, and regulatory arbitrage (NBFCs playing bank-like roles without bank-like oversight). The article warns that investors and operators must prepare for the tightening of liquidity and funding frameworks as NBFCs adjust to the new oversight regime.

Digital disruption and non-traditional risks
The article highlights that the digital transformation sweeping the Indian financial sector adds a new dimension to oversight. With rapid adoption of UPI, digital lending platforms, alternative data credit scoring, algorithmic underwriting, and CBDC (Central Bank Digital Currency) initiatives, banks and NBFCs face novel risks: cyber-security, data privacy, third-party dependencies, algorithmic bias, and fintech regulatory gaps. The RBI is expected to extend oversight into these realms—requiring investment in RegTech (regulatory technology), risk analytics, real-time monitoring, and digital governance. Institutions not prepared for this dual challenge (traditional prudential plus digital regulatory demands) may face compliance failures and reputational risk.

Towards a harmonised regulatory architecture
The article notes a convergence trend: the regulatory gap between banks and NBFCs is narrowing. The SBR, tighter governance norms, higher compliance burdens, and similar capital/liquidity frameworks reflect a move toward a more unified system aligned with global standards (e.g., Basel III). Yet, this convergence entails trade-offs. For banks, greater scrutiny of linkages to NBFCs may limit their risk appetite and intermediation. For NBFCs, increased cost of compliance, governance burdens, and funding constraints may affect growth and profitability. The article argues that policy must strike a balance between ensuring financial stability and maintaining credit flow, especially to underserved sectors.

Conclusion
The article concludes that RBI’s next oversight wave is not arbitrary but a necessary recalibration of the financial sector. Banks and NBFCs must evolve from reactive compliance to proactive resilience, embedding robust risk models, diversified funding structures, digital governance frameworks, and adaptive strategies. Institutions that anticipate and invest in these capabilities will not simply survive the regulatory shift—they will be positioned to lead the next era of financial innovation and inclusion.

Summary: Evolution of Central Banking in India

Rakesh Mohan traces the historical evolution of central banking globally and in India, emphasizing how the Reserve Bank of India (RBI) has evolved from a colonial-era institution to a modern central bank balancing developmental, regulatory, and monetary functions.

1. Global and Historical Background

Central banking is largely a 20th-century phenomenon. Only a handful of central banks existed by 1900; today, nearly 160 operate worldwide. They emerged to stabilize banking systems, issue currency, act as lenders of last resort, and serve as governments’ bankers. Over time, the central bank’s primary focus has shifted from government financing to price and financial stability. Mohan notes that the evolution of central banks has not been uniform—each country’s institutional and economic context has shaped its trajectory.

2. Origins of the RB

India’s central banking history began with the General Bank of Bengal and Bihar (1773) and later the Imperial Bank of India (1921). The Hilton Young Commission (1926) recommended creating a separate central bank to unify currency and credit control. The Reserve Bank of India Act, 1934 came into effect on April 1, 1935, establishing the RBI as a shareholders’ institution, which was nationalized in 1949.
The RBI’s statutory functions were to:

• Issue currency,
• Act as banker to the government, and
• Serve as banker to other banks.

Unlike most central banks, it was also tasked with promoting agricultural finance through the establishment of its Agricultural Credit Department.

3. Developmental Role

The RBI played a developmental role unmatched by most other central banks. It promoted savings, expanded rural credit, and created specialized financial institutions—IFCI, IDBI, ICICI, NABARD, and UTI—to finance industry and agriculture. It also facilitated modernization of financial markets by establishing the Discount and Finance House of India (DFHI), Clearing Corporation of India, and later, the Real-Time Gross Settlement (RTGS) system. The nationalization of major banks in 1969 and 1980 underlined the RBI’s role in aligning banking with developmental goals, resulting in massive branch expansion and rural credit growth.

4. Monetary and Fiscal Interface

During the early planning years, the RBI supported government-led growth by monetizing deficits—printing money to finance public expenditure. This led to fiscal dominance over monetary policy. The automatic monetization of deficits via ad hoc Treasury bills continued until the 1997 agreement, which replaced them with Ways and Means Advances (WMA) and restored RBI autonomy.
Subsequent reforms under the Fiscal Responsibility and Budget Management Act (FRBM), 2003, restricted the RBI’s participation in government debt markets, marking a shift toward independent monetary policy.

5. Regulation and Supervision

After bank nationalization, over 90% of India’s banking assets were government-owned, blurring lines between ownership and regulation. Only post-1991 reforms, with the entry of private and foreign banks, could the RBI exercise effective prudential supervision. It adopted Basel norms, risk-based supervision, and greater emphasis on corporate governance and financial inclusion.

6. Autonomy and Modern Monetary Policy

Economic liberalization enhanced RBI’s autonomy. The shift from direct controls to market-based instruments like open market operations (OMOs) and liquidity adjustment facilities (LAF) improved monetary transmission. While inflation targeting remains debated, the RBI prioritizes price stability alongside growth. Mohan argues India’s structural conditions—supply shocks, regional diversity, and imperfect markets—make rigid inflation targeting impractical.

7. Conclusion

The RBI’s evolution mirrors India’s transformation—from colonial dependency to a liberalized economy. Its journey reflects three enduring mandates: developmental facilitation, financial stability, and monetary control. As India integrates globally, challenges lie in digital transformation, market deepening, and balancing growth with stability. Mohan concludes optimistically that the RBI’s adaptability and pragmatic coordination with government will ensure its continuing leadership in India’s economic progress.

Summary: Financial Regulation and Supervision in India and Japan – Case of Banking Sector

This policy paper conducts a comparative study of the banking regulatory and supervisory frameworks of India and Japan, evaluating institutional structures, compliance with Basel Core Principles (BCPs), and responses to the 2008 global financial crisis. The goal is to draw lessons for strengthening India’s regulatory system.

1. Background and Objectives

The study begins by highlighting how sound banking systems underpin economic growth, financial stability, and poverty reduction. The 2008 financial crisis exposed weaknesses in financial supervision and underscored the need for effective, transparent, and accountable regulatory regimes. Both India and Japan—major Asian economies with mixed banking structures—undertook reforms to align with international standards while addressing domestic realities.

2. Structure of the Banking Sectors

Japan:
The Japanese banking system comprises city banks, regional banks, trust banks, and specialized public financial institutions (Figure 1, p. 191). Regional banks primarily serve small and medium enterprises (SMEs), while government-directed credit has historically influenced capital allocation. The Bank of Japan (BoJ), established in 1882, serves as the central bank, whereas the Financial Services Agency (FSA)—created in 2000—oversees prudential regulation and supervision.

India:
India’s system, shown in Figure 2 (p. 192), is dominated by public sector banks, alongside private, foreign, cooperative, and regional rural banks. The Reserve Bank of India (RBI), founded in 1935 and nationalized in 1949, functions as both monetary authority and regulator. As of 2009, there were 172 UCBs, 96 RRBs, and 63 Rural Cooperative Banks operating nationwide. Non-banking financial companies (NBFCs), regulated under Chapter III-B of the RBI Act 1934, fill credit gaps in retail and small-enterprise financing.

3. Regulatory and Supervisory Framework

Japan:
Until 1998, regulation was under the Ministry of Finance (MoF). Post-reform, oversight transferred to the Financial Services Agency (FSA), which integrated supervision of banking, securities, and insurance. The FSA’s core objectives include market stability, depositor protection, and ensuring fair competition. It issues ordinances under the Banking Act (1981) and uses tools such as on-site inspections and risk-based supervision.

India:
The RBI regulates banks under the Banking Regulation Act 1949, using both on-site and off-site surveillance. Specialized acts govern specific areas (e.g., Banking Companies Act 1970, NABARD Act, Deposit Insurance Act). The RBI has transitioned from rule-based to risk-based supervision (RBS), supported by its Department of Banking Supervision.

4. Basel Core Principles and Compliance

Both countries benchmark their supervisory frameworks against Basel Core Principles. India participated in IMF-World Bank Financial Sector Assessment Programs (FSAP) in 2001 and 2009; Japan did likewise through the FSSA initiative. India’s 2009 CFSA Report confirmed compliance with most BCPs and noted progress in prudential regulation and off-site surveillance. Japan’s FSA achieved similar compliance but with a more formalized legal structure.

5. Comparative Insights

• Legal Framework: Japan’s system is rule-dense and ordinance-driven; India’s is simpler but centralized.
• Information Exchange: Japan has formal MoUs among regulators; India relies mainly on informal coordination.
• Capital Adequacy (CAR): India 13.2%, Japan 12.3% (2009) – both above Basel norms.
• NPA Ratios: India 2.3%, Japan 1.9%.
• Internal Controls: Both enforce internal audits and Anti-Money Laundering (AML/KYC) standards.
• Consolidated Supervision: Both countries supervise banking groups; Japan’s FSA wields greater statutory authority.

6. Policy Recommendations

The author suggests:

1. Enhanced cooperation between regulators through formal MoUs.
2. Expanded consolidated supervision covering NBFCs and cooperative banks.
3. Greater regulatory independence balanced with accountability.
4. Adoption of global best practices such as stress testing and capital planning.
5. Improved resource allocation to develop regulatory capacity and technological oversight.

7. Conclusion

Both India and Japan have strengthened post-crisis financial regulation, though at different stages of sophistication. Japan exemplifies institutional maturity and formalism, while India demonstrates adaptive flexibility and inclusiveness. The convergence of regulatory practices under Basel norms signifies progress toward a resilient Asian financial system. The study concludes that sustainable stability requires continuous refinement of prudential supervision, improved coordination among authorities, and a balanced approach between market efficiency and financial safety.

Summary – “Financial Regulation and Supervision in India and Japan: Case of Banking Sector” by Sirjjan Preet, published in The JSRI Journal of Financial and Securities Markets (Vol. 79, 2010).

The paper offers a comparative study of financial regulation and supervision in the banking sectors of India and Japan, focusing on institutional design, compliance with Basel Core Principles (BCPs), and post-crisis policy reforms. It aims to understand how two major Asian economies ensure banking stability under distinct historical and institutional conditions.

1. Introduction and Background

Banks, the author notes, are central to economic growth, inclusion, and capital formation. The 2008 global financial crisis exposed weaknesses in supervision and triggered reassessment of regulatory models. Both India and Japan undertook reforms aligning with Basel standards while adapting to domestic needs. The paper’s goal is to identify lessons for emerging markets in developing sound prudential frameworks.

2. Structure of the Banking Sectors

Japan:
As illustrated in Figure 1 (p. 191), Japan’s system includes city banks, regional banks, trust banks, and public financial institutions. Regional banks mainly fund local SMEs; city banks serve large corporates. Historically, state influence was high, with public institutions channeling credit for policy purposes. By 2009, six foreign banks operated in Japan, while postal and development banks still held large public stakes.

India:
Figure 2 (p. 192) shows India’s structure centered on the Reserve Bank of India (RBI)—established in 1935 and nationalized in 1949—supervising public-sector, private, foreign, cooperative, and regional rural banks. Public-sector banks dominate, holding over 70 percent of assets. Non-banking financial companies (NBFCs) complement banks in retail and MSME credit. As of 2009, India had 1,723 UCBs, 96 RRBs, and 63 RCBs, reflecting the sector’s diversity.

3. Regulatory and Supervisory Frameworks

Japan:
Until 1998, the Ministry of Finance (MoF) supervised banking. Post-reform, powers transferred to the Financial Services Agency (FSA)—an integrated regulator under the Cabinet Office. The FSA’s three goals are: financial system stability, depositor protection, and sound market function. It issues ordinances under the Banking Act 1981 and conducts on-site inspections and risk-based supervision (page 194).

India:
The RBI serves as both monetary authority and prudential supervisor under the Banking Regulation Act 1949. It exercises on-site inspections, off-site surveillance, and thematic reviews through the Department of Banking Supervision. Its mandate covers solvency, liquidity, risk management, and consumer protection. India’s framework evolved from prescriptive to risk-based regulation, aligning with Basel II and III norms (page 195).

4. Basel Core Principles and Compliance

Both countries benchmark themselves against the BCPs through IMF–World Bank assessments.

• India completed Financial Sector Assessment Programs (FSAP) in 2001 and 2009, confirming high compliance and prudential soundness.
• Japan’s Financial System Stability Assessment (FSSA) under the IMF (2003) found a comprehensive, integrated supervisory regime.
  Both nations maintain capital adequacy ratios (CAR) above the 8 percent Basel minimum—India 13.2 %, Japan 12.3 % (see Table 1, p. 203). Non-performing loan ratios were 2.3 % and 1.9 %, respectively.

5. Comparative Findings

• Legal framework: Japan’s multi-layered system (Acts, Cabinet Ordinances, FSA guidelines) is more formalized; India’s centralized under RBI.
• Information exchange: Japan’s regulators use MoUs for data-sharing; India’s arrangements are ad-hoc.
• Internal controls: Both mandate audits, AML/KYC compliance, and risk management committees.
• Consolidated supervision: Both oversee banking groups; Japan’s FSA has broader statutory reach.

6. Policy Insights

The author proposes:

1. Formal cross-border MoUs to enhance regulatory cooperation.
2. Expanded consolidated supervision covering NBFCs and cooperative banks.
3. Stronger autonomy and resource capacity for regulators.
4. Periodic review of laws to incorporate evolving Basel norms.
5. Technology-driven oversight to address systemic risks.

7. Conclusion

Both India and Japan have achieved resilient banking sectors through prudent regulation and adaptation to global standards. Japan exemplifies legal precision and institutional depth, whereas India shows regulatory flexibility suited to an emerging economy. The study concludes that sustained financial stability requires balancing innovation with oversight, ensuring that regulatory convergence does not impede credit growth or inclusion.