Regulation for a No-Pause Financial System in a Fast-Moving Economy

The Reserve Bank of India today is a formidably resilient full service central bank, tempered by repeated domestic and global stress episodes that have tested its credibility. Strong micro-prudential metrics, credible supervision, and system-level stability, even amidst severe global shocks, attest to this institutional maturity. But past resilience should not be mistaken for future immunity.

The risk landscape has changed shape. Risks are now non-linear, rapidly transmissible, and deeply interconnected across balance sheets, conduct frameworks, digital platforms, technologies, and cross-border channels. This challenge is amplified by an exceptionally wide regulatory perimeter spanning banks, NBFCs, cooperatives, fintechs, BigTech-linked intermediaries, and payment systems. Add deepening household financialisation, tighter global capital linkages and growing dependence of regulated entities on unregulated technology ecosystems, and the supervisory task becomes both broader and more complex.

Static, rule-heavy or backward-looking regulation in such an environment risks becoming pro-cyclical. What is required instead is a ‘forward vision’ to regulate tomorrow’s risks rather than yesterday’s failures. Encouragingly, the RBI has begun re-engineering how banks interpret risk, price and allocate capital, access international liquidity or position themselves in a fragmented global financial order.

Recent measures by the RBI, including withdrawal of market micro-controls, rationalisation of current account rules, liberalisation of group operations and selective easing of exposure norms, signal a shift towards outcomes-based regulation. Alongside proposals for strategic entry of foreign capital into banks such as Yes Bank and RBL Bank and enabling of market-based financing for mergers and acquisitions, these moves point to something more consequential than routine regulatory fine-tuning. They suggest a deliberate redesign of India’s financial architecture, where systemic stability depends as much on institutional adaptability as on balance-sheet strength.

System Design
The long-delayed insistence on migration to the Expected Credit Loss framework illustrates this forward regulatory philosophy. Despite strong capital buffers and improved asset quality, ECL embeds forward-looking risk assessment into bank balance sheets, reduces cliff effects in provisioning during downturns and aligns accounting recognition with economic reality. But this is just the beginning. Resolution framework for weak and failing banks, deeper domestic capital pools, sustainable finance structures, and long-pending internal process reforms remain unfinished business. 

Calibrated liberalisation, while essential for efficiency and competitiveness, also reshapes the system’s risk topology. As regulatory frictions ease, vulnerabilities may surface outside traditional supervisory hotspots, within complex group structures, technology-driven intermediaries, and lightly regulated service providers, where leverage, liquidity stress, and governance weaknesses are harder to detect and quicker to amplify. Greater openness to foreign capital can strengthen balance sheets, but it can also import volatility, herd behaviour and abrupt shifts in sentiment. A regulatory stance that relies more on institutional discretion therefore raises the cost of weak governance, poor data quality, and internal controls.

A fundamental insight of modern central banking is that regulation does not merely constrain behaviour, it shapes and influences incentives, business models, funding structures, and risk migration. It is not just ‘rule-making’, but system design. That design must rest on three pillars. 

First, system-centricity: assessing concentration risks across sectors, lenders, and funding channels to understand correlated behaviours (such as digital runs), recognising that risks may migrate rather than disappear when regulation tightens unevenly. Second, proportionality: a one-size-fits-all approach raises compliance costs without improving stability. India’s heterogeneous financial system needs tiered, activity-based oversight and dynamic thresholds that evolve with scale, complexity, and interconnectedness.  Third, governance focus: global experience shows failures stem less from inadequate rules than from weak governance, poor risk and compliance culture, and misaligned incentives. Regulation must place sharper emphasis on board effectiveness and accountability, senior management ownership of risk outcomes and incentive structures that internalise long-term stability.

Regulatory easing is often misinterpreted as a weakening of prudence, though in practice liberalisation and regulation reinforce each other. Sustainable liberalisation is possible only when supervisory capacity is strong and confidence in regulated entities is earned. Greater reliance on institutional judgement, therefore, must be bound by clear guardrails and anchored in non-negotiable accountability of boards and senior management. This calls for supervision that is far more penetrating and grounded in granular, high-frequency data, rigorous stress testing, consolidated group oversight, and specialisation, supported by continuous risk surveillance and well-defined early-intervention triggers.

Technology is central to this transition. RBI’s investments in RegTech and SupTech are foundational, but the next phase must prioritise near-real-time supervisory dashboards, network-based risk analytics, and AI-enabled early-warning systems.  Done well, this allows regulation to carry a lighter visible footprint but a deeper analytical reach.

Equally important is a predictable and proportionate enforcement framework that serves as a credibility anchor instead of a punitive tool. Enforcement should anchor trust, signal zero tolerance for governance and conduct failures, and remain consistent, measured and principle-based. Embedded within a supervisory continuum, early intervention and moral suasion reduce the need for blunt action.

Ultimately, consumer trust is the system’s most fragile asset. Stability not anchored in consumer confidence is inherently unsustainable.  This requires protection to be integrated as a core stability function rather than a narrow conduct obligation, necessitating a methodological shift from procedural compliance to outcome-based supervision, centered on fairness, ethics and actual consumer experience. In this ecosystem, mis-selling, dark patterns, and digital fraud exhibit early signals of systemic stress rather than isolated lapses  warranting timely and proportionate regulatory intervention.

Under the new regulatory paradigm, policy response must redesign its safeguards. The forward vision of regulation is about stewardship: anticipating risks before they crystallise, enabling financial deepening without fragility, and balancing innovation with inclusion-led trust.

Regulation, reimagined this way, becomes a strategic instrument of nation-building for a resilient and credible financial system in a rapidly changing world.  It is not merely a shield against crises, but a compass for sustainable, secure and equitable progress.

* The view expressed are personal