News Brief
RBI Governor Sanjay Malhotra.
Following a Monetary Policy Committee meeting, the Reserve Bank of India (RBI) announced sweeping reforms 1 October, targeting banking, capital markets, and rupee internationalisation.
Here are 10 measures announced by the central bank that could deepen markets, expand credit, and go a long way in internationalising the rupee.
1. The RBI has eased lending norms for banks. The limit on loans against shares (LAS) has been raised five-fold from Rs 20 lakh to Rs 1 crore.
2. Restrictions on lending against listed debt securities have been completely removed.
3. Banks are now permitted to finance mergers and acquisitions as well as initial public offerings. This marks a change from earlier rules that discouraged bank funding for these activities.
4. In addition, the central bank has withdrawn a 2016 framework that restricted lending to large corporates with credit needs above Rs 10,000 crore. This enables banks to participate more actively in financing large projects.
5. The RBI has also postponed implementation of some regulatory requirements. The adoption of the Expected Credit Loss framework and full Basel III capital norms has been deferred to April 2027, with final compliance due by March 2031.
6. Risk weights for infrastructure loans by non-bank financial companies (NBFCs) have been reduced to ease credit access for the sector. When non-bank financial companies (NBFCs) lend money for infrastructure projects like roads or power plants, regulators require them to keep a portion of their capital as a safety buffer. This is called a "risk weight."
The RBI has now reduced these risk weights, meaning NBFCs need to hold less money in reserve. This frees up capital for lending and also brings down its cost.
7. The ceiling on bank financing for individuals subscribing to IPOs has been raised from about Rs 10 lakh to Rs 25 lakh.
8. The RBI has also proposed that foreign entities holding surplus rupee balances in vostro accounts be allowed to invest in corporate bonds and commercial paper, in addition to government securities.
9. The RBI has also permitted Indian banks to extend rupee-denominated loans to non-residents in neighbouring countries such as Nepal, Bhutan, and Sri Lanka.
10. the RBI has introduced reference exchange rates for currencies of major trading partners, including the Indonesian rupiah and the UAE dirham. This is intended to facilitate smoother rupee-based trade settlements.
When Indian businesses trade with countries like Indonesia or the UAE, they need to convert rupees into local currencies (rupiah or dirham). Previously, there was no official RBI rate for these conversions. Traders relied on international markets, often converting rupees to US dollars first, then to the target currency.
The RBI now publishes official reference exchange rates for these currencies. The expected result? Indian businesses will now be able to trade more efficiently with major partners, reducing dependence on the dollar and promoting direct rupee-based trade settlements.
To summarise, the central bank unleashed reforms across a wide array of domains:
--Banking: higher limits on loans against shares, new permissions for acquisition and IPO financing, and withdrawal of restrictions on large corporate lending.
--Capital markets: raised limits on IPO financing for individuals.
--Corporate financing: banks permitted to re-enter very large loan exposures and acquisition funding.
--Bond markets: expanded investment options for non-residents holding rupee balances.
--Capital controls: calibrated easing, including rupee loans to neighbouring countries.
--Internationalisation: introduction of new reference exchange rates and greater opportunities for rupee use abroad.