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Informist, Thursday, Nov. 20, 2025

 

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--RBI Malhotra: Share of bank intermediation down, best if it happens slowly 
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--RBI Malhotra: Regulation customised to India after looking at global norms
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--CONTEXT: RBI Governor Sanjay Malhotra delivers VKRV Rao Memorial Lecture 
--RBI Malhotra: Bank failure can cascade into systemic crisis

 

NEW DELHI – The share of banking intermediation in the financial system has come down and the best thing would be if it happens slowly, Reserve Bank of India Governor Sanjay Malhotra said Thursday. It is also important that the shift away from the banking system happens on both asset and liability front, he said.

 

In 2024-25 (Apr-Mar), the total advances of non-banking financial companies grew 20.7%, exceeding the 11.0% growth recorded by banks, RBI data shows.

 

The move to alternate modes of parking savings such as mutual funds and away from bank deposits is a natural consequence of the country's progress, the governor said. However, a quick shift away from bank deposits and the influx of savings in mutual funds schemes – especially those participating in equity markets – may pose some risks. In this case, not only the liability base of banks but their asset base is also shifting as corporates are preferring to raise funds through the debt market rather than approaching banks. As long as the movement is balanced, it would mitigate the risks, he said.

 

"Banks will continue to grow, possibly the share thereof in intermediation will come down. That's happening. Its best if it happens slowly," the RBI governor said while delivering the V.K.R.V Rao memorial lecture at the Delhi School of Economics here. "At the same time, on the lending side also, a lot of the corporates and NBFCs (non-banking finance companies) are now moving from bank borrowing to market-based borrowing."

 

Malhotra said he found speaking about monetary policy to students boring and instead chose to speak about financial regulation at the event. However, while interacting with the students, he said he cannot pre-empt the Monetary Policy Committee's decision that will be taken in December. So far in 2025, the RBI's rate-setting panel has cut the repo rate by 100 basis points to 5.50%.

 

His speech was mostly regarding financial sector regulation - the tenets of regulation that RBI follows and why regulation is necessary. Explaining the need for regulation, he said there are three key reasons. First, the financial sector is interconnected, for example, if a bank fails, it has a cascading effect - depositors lose savings, interbank markets freeze, credit supply contracts and payment systems can falter, impacting the entire economy which can feed into a systemic crisis.

 

Secondly, he said, financial institutions are inherently fragile because of maturity and liquidity transformation. "So we as savers, we deposit in the banks for very, very short terms but the banks then transform this and give it as loans which are generally of longer term, this transformation is very economically, you know, very, very valuable but at the same time it creates a vulnerability," the governor said. Thirdly, according to him, financial markets are "prone to pro-cyclicity and a herd behaviour".

 

Against this backdrop, he said, the RBI's foremost responsibility is to ensure systemic financial stability. "...because while we do realise that short-term growth can be achieved at the cost of financial stability but financial instability can have much bigger consequences for the long run, they can have much more losses than the gains achieved due to the short-term rapid growth."

 

Speaking about how the RBI actually regulates the financial sector, Malhotra said the first tenet is principle-based formulation, second is that regulation should be proportional, and third is to have more evidence and data-based regulation.

 

"So in RBI in our country, what we have done is that we are gradually moving towards a principle-based approach but retaining some of the rules that are already there. So it's a hybrid approach that we are following," he said. The Expected Credit Loss framework is an example of principle-based regulation, he said.

 

He also said there cannot be a one-size-fits-all regulation for everyone. "So more the complexity, more the scale of operations, more are the stringent the regulations and vice versa. Evidence-based regulation, he said, is very challenging especially in the financial sector. To help deal with this, RBI also uses international standards which are then customised to Indian financial sector needs.

 

An important part of regulation, Malhotra said, is also periodically reviewing those regulations. "In this rapid age where technological transformation is happening at economic speeds, it is very important that as soon as the context changes, we are agile enough to look back into those regulations and see as to whether they need to be fine-tuned, they need to be reviewed or not."

 

Against this backdrop, the RBI is trying to continuously adapt, and is vigilant and alert to emerging risks and evolving conditions. "We are encouraging innovation while being mindful of our regulatory objective of safeguarding systemic stability. We are trying to simplify regulations where possible while maintaining the necessary safeguards and guardrails. We are strengthening coordination with all other regulators while at the same time respecting the jurisdictional boundaries," he said. 

 

The governor said that the central bank's approach is very clear, that forbearance should be only exceptional. To make this point, he said that even the recent measures taken by the RBI to aid exporters have a specific deadline so that no misuse happens. He also said that the RBI is aware of the cost of regulation and it needs to be recognised.

 

The governor spoke on multiple other things during the interaction with students including on regulating cryptocurrency. Malhotra said that stable coins, cryptocurrencies have huge risks and so the RBI is adopting a very cautious approach. "But yes, we are promoting and experimenting with CBDC (central bank digital currency), which is a crypto, which is backed by the central banker, by RBI," he said. "And that's (CBDC) as an alternative (to crypto), first of all, to payments within our country and more importantly, for wholesale payments and cross-border payments."

 

On the recent rupee depreciation, the governor said that it is depreciating because there is a demand for dollars. "But the underlying factor is, how does this demand change?... the demand changes because of the capital flows and the current account flows, both," the governor explained. "So, the recent depreciation that you have seen is because on the trade side, there are some additional penal tariffs, as a result of which expectations have built up that our trade deficit may go down. Now, whether it will happen or not, because a lot of it depends on expectations, that is one (thing)," he said.

 

So far in 2025, the rupee has depreciated 3.6% against the dollar.

 

The governor further said that "exports did come down in the month of October and capital flows have been muted, but we are quite confident that there will be a good trade deal (with US, hopefully, going forward". "And that should relieve whatever pressure has been there on our current account."

 

New Delhi is engaged in talks with Washington for a trade deal, with the two sides having so far held five rounds of negotiations. The US in August imposed a 50% tariff on imports from India, 25% of which was a punitive measure for New Delhi's continued purchases of crude oil from Moscow.

 

On the Flexible Inflation Targetting framework, the governor refused to comment whether the central bank should target headline inflation or core inflation. "I would not like to give our view right now, because at this stage, the review is in process, and we will give our recommendations after we have done the consultation, and we have formed our view, and we send it to the government," he said.

 

The flexible inflation targeting framework is up for review in 2025-26 (Apr-Mar). Under the monetary policy framework, the government has set a 4% CPI inflation target from Apr. 1, 2021, to Mar. 31, 2026, within a tolerance band of 2% to 6%. The existing framework is set to lapse on Mar. 31. The current framework has a 2-6% tolerance band given the high share of food which tends to have volatile prices, governor said.

 

On Mulehunter.ai, an advanced artificial intelligence and machine learning model developed by Reserve Bank Innovation Hub, Malhotra said that the RBI is "quite near to" the intermediate milestone of 20 banks adopting it. "I think we are quite near it. It's in high tens, it's in high double digits. We are well on target to achieve it. It has a good success rate," he said.

 

First introduced during the Global Fintech Fest in August 2024, MuleHunter.ai helps tackle the growing menace of mule bank accounts and digital frauds. Unlike conventional fraud detection systems that rely on predefined rules, MuleHunter.ai continuously learns from data, enabling it to adapt and evolve in response to increasingly fraudulent methods.

Speaking about creating globally competitive big banks, the governor said that it is only a matter of time before several Indian banks will be in the top 100 global banks. He said he did not have a number in mind on how many banks can enter the top 100 league but said "as many as possible" should happen.

 

"That will happen as our banks grow, as our economy grows, which has been growing at this pace. And there are many banks in the public sector area, even in private sector, the pace at which they are growing, I think it's only a matter of time that we will have a number of banks, quite a few banks, in the top 100 banks of the world," he said.

 

On Nov. 6, Finance Minister Nirmala Sitharaman had said that India needs lots of "big and world-class banks" and the government has already begun work on it by initiating discussions with the RBI and banks to see how amalgamation of public sector banks can be taken forward.

 

In terms of global scale, according to S&P Global Market Intelligence, SBI is the 43rd largest bank by assets in the world. Private sector lender HDFC Bank is the second Indian bank in the top 100 largest banks, placed 73rd.  End

 

US$1 = INR 88.71

 

Reported by Aaryan Khanna and Priyasmita Dutta

Edited by Ashish Shirke

 

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