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Criticism of the RBI often finds enthusiastic support among entities subjected to its tougher scrutiny, but such applause does not diminish the legitimacy of its role as the custodian of financial stability. While the RBI is not without its flaws or idiosyncrasies, these cannot be mistaken for overreach or used to question its authority.
The unique reality of India’s regulatory framework is that there is no appellate body for RBI decisions, unlike with other regulators. Until the political system decides otherwise, this framework demands that critics and cynics operate within the bounds of regulatory tolerance—particularly if they are regulated entities themselves. The RBI’s authority, whether welcomed or resented, is integral to the functioning of the financial ecosystem, and its decisions must be engaged with constructively rather than contested in isolation.
Credit access is fundamentally shaped by the business strategies of lending institutions, determined by their promoters and boards, and not directly by the RBI. Decisions about which sectors or borrower segments to serve are commercial choices, often influenced by risk appetite and profitability considerations. The challenge for Public Sector Banks is that of government ownership, and governance-arbitrage that they have due to differing law that governs them compared to private sector banks.
However, supervising the lending sector and ensuring fairness in their practices is unquestionably within the RBI’s remit. The argument that acting against exploitative lending practices might push consumers toward the unregulated informal sector cannot justify leniency of supervisory action or decision to penalise.
The RBI has every right to intervene where it sees systemic exploitation or market distortion, ensuring that lending practices align with broader principles of equity and transparency. But then, it would be better if the RBI offers direct answer on what constitutes a fair interest rate instead of leaving it to individual entity Boards.
Whether they agree or not, the regulator’s hierarchy of focus and favourable treatment often prioritises banks over non-banking financial companies (NBFCs), despite both sharing the same regulatory parentage. This differentiation in treatment can sometimes feel akin to bias—like a foster child receiving step-parently care.
NBFCs are alternately celebrated as indispensable credit providers and vilified as systemic risks, with little consistency in how they are regarded. This fluctuating narrative undermines confidence in the sector and creates regulatory unpredictability. Much like in a family, the way the parent treats all its children sets the tone at the table.
A persistent challenge that not many admit or debate, is the underdevelopment of India’s debt markets. These markets have remained shallow for long, with government borrowing and highly-rated corporates dominating issuance. The result is a lending landscape that operates like a short-lived battery cell, be it AAA or AA: readily powering top-rated corporates and public sector entities, but leaving lower-rated borrowers, SMEs, MSMEs, and retail participants with limited access to mainstream credit. Without alternatives, these entities either face exorbitant interest rates or are pushed towards informal markets with even more usurious terms. It is an elephant in the room few wish to address.
Compounding this problem is the lack of differentiation in Indian banking, where risk aversion and an obsession with safety lead to credit hoarding by large, well-rated entities. There is almost no differentiation in banking products. The corporate bond market, which should ideally provide an avenue for top-tier companies remains underutilised, making it for lazier corporate banking.
The non-banking financial company (NBFC) sector, often touted as a crucial alternative credit provider, presents its own conundrum. Of the nearly 10,000 registered NBFCs in India, one guesstimates that only about 3-4,000 are operational in lending. The rest might be ornamental entities, serving accounting purposes or flying under regulatory radar, with some even facilitating predatory lending practices. This has tarnished the sector’s credibility and made it a target for regulatory crackdowns. The answer is available with the RBI, for shutting these non-active entities so that their own supervisory time is salvaged.
The issues plaguing the financial ecosystem today echo many of the concerns raised over a decade ago by the Financial Sector Legislative Reforms Commission (FSLRC). The commission proposed a complete overhaul of India’s fragmented regulatory framework to create a more streamlined, transparent, and accountable system.
Its (FSLRC) recommendations, which included simplifying financial laws, rationalising regulatory overlaps, and fostering innovation, were lauded at the time but largely sidelined due to institutional inertia and political resistance. In today’s context, where economic growth is intricately tied to efficient financial intermediation, it might be time to revisit the FSLRC’s ideas with fresh urgency.
But who will bell the influentials on this issue? Reforming India’s financial architecture is not merely a matter of policy design; it requires tackling entrenched interests and powerful lobbies that thrive on the status quo. Adding to the challenge is the territorial mindset of regulators, where no one is willing to concede an inch to another, let alone collaborate across verticals of control.
Breaking through these silos and fostering genuine cooperation is as critical as challenging the lobbies themselves if India’s financial system is to evolve meaningfully. Even the Financial Stability and Development Council (FSDC) also has not solved it.
Chaired by the Finance Minister and comprising the heads of the RBI, SEBI, IRDAI, PFRDA, and other financial regulators, its mandate includes ensuring financial stability, enhancing market development, and fostering inter-regulatory coordination. While individual regulators have made varying strides in their domains, the absence of a unified strategy under the FSDC has resulted in inefficiencies that stymie progress and leave significant portions of the economy underserved. Instead of catalysing structural reforms, it has been silent.
No doubt that we see the financial regulations oscillate between ambitious declarations of intent and patchy supervisory execution. This lack of focus has led to a regulatory landscape that swings between bold but uncoordinated attempts to stimulate market growth and reactive measures borne out of desperation. Without tackling these entrenched issues head-on, debates around “misdirected” regulation will remain distractions.
—The author, Dr. Srinath Sridharan ( @ssmumbai), is a Policy Researcher & Corporate advisor. The views expressed are personal.
Reead his previous articles here
