ECONOMYNEXT – The Reserve Bank of India’s recent regulatory reforms are positive for the country’s financial sector, Fitch Ratings has said.
“Package of 21 reforms will be broadly positive for the country’s financial sector, with an improved regulatory framework likely to strengthen the bank operating environment.”
The full statement is reproduced below:
Indian Banks to Strengthen Resilience Under Central Bank Reforms
Fitch Ratings-Hong Kong/Mumbai-12 October 2025: Fitch Ratings believes the Reserve Bank of India’s (RBI) recent package of 21 reforms will be broadly positive for the country’s financial sector, with an improved regulatory framework likely to strengthen the bank operating environment.
Another ratings benefit arises from closer regulatory alignment with IFRS 9 accounting standards.
Effective implementation could strengthen banks’ risk profiles through enhanced underwriting and risk controls.
The RBI plans to apply a forward-looking expected credit loss (ECL) framework from 1 April 2027, moving away from the existing incurred-loss provisioning system and bringing India into line with international standards. Banks will be allowed to smooth out provisioning adjustments until March 2031.
We now estimate the system-wide impact of the move will be slightly less than we had assumed in August 2024, when we projected it would reduce common equity Tier 1 (CET1) capital ratios by about 55bp at the time of the switch, rising to 100bp over the course of the transition period.
The reform is unlikely to put meaningful pressure on rated banks’ capitalisation and leverage scores, one of the key rating drivers in our standalone Viability Rating (VR) assessment.
Banks have been preparing for the adoption of ECL for many years. Their CET1 ratios and internal capital generation are close to cyclical highs, which should soften the impact on core capital.
There is likely to be a modest hit to profitability from higher credit costs under ECL.
Still, Indian banks’ VR scores for earnings and profitability are unlikely to be affected, as the banks should be able to absorb them without operating profit/risk-weighted asset (RWA) ratios falling significantly below Fitch’s current forecasts.
We expect this ratio to remain significantly higher for private banks than for state banks, due to better pre-impairment profitability. State banks’ credit costs, which are at a cyclical low, are likely to rise slightly more than those for private banks.
The impact of ECL adoption on CET1 and operating profit/RWA ratios may be mitigated by another reform: the introduction of revised Basel III risk-weights, with effect from April 2027. The change will result in lower risk-weights for some loan categories, including corporate, SME and home loans, and prime credit card borrowers.
Indian banks’ Issuer Default Ratings are underpinned by government support, and are unlikely to change – even if VRs are downgraded – so long as our support expectations remain unchanged.
Another reform will create an enabling framework for lending against securities and lending to finance acquisitions by corporates. The changes should give banks more business opportunities.
Banks’ exposure to market risk may increase slightly, but with only a modest impact on risk profiles because we anticipate underwriting and exposure limits will remain conservative.
We believe the RBI’s decision to withdraw proposed restrictions on banks and their subsidiaries doing similar business provides banks with greater operational freedom, without necessarily increasing risks, because subsidiaries are also supervised by the RBI.
The RBI’s proposal to lower risk-weights on financing operational infrastructure assets may help free up regulatory capital for Tata Capital Limited (BBB-/Stable), which has a small portfolio of such loans (less than 10% of total loans).
However, most rated non-bank financial institutions (NBFIs) are not significantly exposed to such lending.
The removal of the 450bp cap over the benchmark for pricing foreign borrowings could allow lower-rated NBFIs to increase foreign-currency funding, subject to market risk appetite.
Meanwhile, a proposal to allow NBFIs to raise over USD750 million in foreign-currency funding annually, without prior regulatory approval, should ease the process for larger offshore debt-raising.