The Reserve Bank of India (RBI), the nation’s central bank and banking regulator, has been proactively steering the Indian banking sector towards greater resilience and global alignment. The year 2025 has been particularly significant, with the RBI rolling out a series of reforms aimed at strengthening the foundations of the banking system, ensuring its long-term stability, and preparing it for future challenges. The October 2025 monetary policy review, in particular, has laid down a clear blueprint for the future of Indian banking, with a focus on the phased implementation of the Expected Credit Loss (ECL) model and updated Basel III capital norms. This article delves into these key reforms, explaining what they are, why they are important, and what they mean for the various stakeholders in the banking ecosystem.
At the heart of the RBI‘s recent reforms is the transition to the Expected Credit Loss (ECL) model for provisioning by banks. This marks a paradigm shift from the current “incurred loss” model, where banks make provisions for bad loans only after a default has occurred. Under the ECL model, banks will be required to estimate and provide for potential future credit losses, even before a loan turns sour. This forward-looking approach is designed to make banks more proactive in managing credit risk and to ensure that they have adequate buffers to absorb potential losses, especially during economic downturns. The phased rollout of the ECL model is a testament to the RBI’s commitment to building a more resilient and future-ready banking sector. For bank customers, this could mean more stringent lending criteria as banks become more cautious about credit quality. For investors in bank stocks, this could lead to more predictable and stable earnings in the long run, as the impact of bad loans is cushioned by upfront provisions.
Complementing the move to the ECL model are the updated Basel III capital norms. Basel III is an international regulatory framework for banks that sets out minimum capital requirements to ensure that banks have enough capital to absorb unexpected losses. The RBI has been progressively implementing these norms in India, and the latest updates are aimed at further strengthening the capital adequacy of Indian banks. These updates include a higher capital conservation buffer and the introduction of a counter-cyclical capital buffer, which can be activated during periods of excessive credit growth to cool down the system. A well-capitalized banking system is crucial for financial stability, as it reduces the risk of bank failures and the need for taxpayer-funded bailouts. The RBI’s focus on strengthening the capital base of banks is a clear indication of its commitment to ensuring the long-term health of the financial system.
Beyond the ECL model and Basel III norms, the RBI is also pushing for other structural reforms to enhance the efficiency and competitiveness of the Indian banking sector. Finance Minister Nirmala Sitharaman has spoken about the need for “big, world-class banks” in India, and discussions are underway with the RBI and other lenders in this regard. This could signal a new phase of consolidation in the banking sector, with smaller banks merging with larger ones to create entities that can compete on a global scale. A consolidated banking sector could offer several benefits, including economies of scale, better risk management, and the ability to fund large infrastructure projects. However, it could also lead to concerns about reduced competition and the potential for a few large banks to dominate the market. The RBI will have to carefully navigate these issues as it pursues its vision of creating a more robust and competitive banking landscape.
In a move that will directly impact all bank account holders, the RBI has also introduced new rules for bank account nominations, which came into effect on November 1, 2025. Under the new rules, it is mandatory for banks to clearly inform customers about the nomination facility while opening a new account. This is a simple but important step to ensure that account holders are aware of the importance of appointing a nominee to avoid legal hassles for their family members in the event of their demise. The RBI has been consistently pushing for greater customer protection, and this is another step in that direction.
On the monetary policy front, the RBI has been actively managing liquidity in the system to support economic growth while keeping inflation in check. The central bank has been intervening in the bond market to ease pressure and has hinted at the possibility of open market bond purchases. This has boosted market sentiment and brought down bond yields. The RBI’s repo rate, which is the rate at which it lends to commercial banks, was reduced by 50 basis points to 5.50% in June 2025, in a bid to spur growth. The central bank’s actions are a clear indication of its commitment to supporting the economy’s recovery from the recent slowdown.
The RBI’s multi-pronged approach to reforming the banking sector is a welcome move. The focus on strengthening risk management practices, enhancing capital adequacy, and promoting customer protection will go a long way in building a more resilient and vibrant banking system in India. As the Indian economy continues to grow, a strong and stable banking sector will be crucial to support its growth trajectory. The RBI’s recent reforms are a step in the right direction, and they are expected to have a lasting positive impact on the Indian financial landscape.