On 1 st October, 2025 Reserve Bank of India unveiled its most comprehensive reforms in over a decade, aimed at countering US-driven headwinds and expanding credit to companies, while deepening capital market activity. Banks can now finance mergers and acquisitions, and IPOs more freely, while limits on loans against shares and listed debt securities have been raised.

On of the key measures is the easing of borrowing rules for companies with bank loans above Rs 10,000 crore, removing the previous cap and extra capital requirements that made lending costly. The RBI has proposed to implement the rationalised norms from April 1, 2026, a move that will open up more funding avenues for corporates. 

The Central bank said the draft ‘Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025’ seeks to rationalise and consolidate the applicable regulations governing such exposures. It has invited comments on the draft from stakeholders by November 21, 2025. Capital Market Exposure (CME) includes direct exposures (investments in securities) and indirect exposures (lending against securities, financing to capital market intermediaries like stockbrokers and custodians). The existing guidelines have been comprehensively reviewed to align with evolving market practices and provide a more enabling framework for bank financing of CME, the draft said.

“Acquisition finance may be extended by banks to Bharatiya corporates for acquiring equity stakes in domestic or foreign companies as strategic investments, i.e. those investments, which are driven by the core objective of creating long-term value for the acquirer through potential synergies, rather than mere financial restructuring for short-term gains,” it said. This has been a long-pending demand of Bharatiya banks. Recently, the State Bank of India Chairman C.S. Setty also made a strong case for permitting banks to provide funding for mergers and acquisitions, as done by global lenders.

Acquisition finance can be extended directly to the acquiring company, or its step-down special purpose vehicle (SPV) set up specifically for acquiring the target firm, the draft said. “A bank may finance at most 70% of the acquisition value, with at least 30% of the acquisition value to be funded by the acquiring company in the form of equity using its own funds,” it added.

The draft further said banks may grant loans to individuals for subscribing to shares under an initial public offer (IPO), follow-on public offer (FPO), or under an employee stock option plan (ESOP) up to ₹25 lakh per individual, subject to certain conditions (this includes a minimum cash margin of 25%). The current limit is ₹10 lakh. Further, the draft proposes a loan-to-value (LTV) for loans against eligible securities to individuals. Eligible securities include G-secs, mutual funds, sovereign bonds, listed shares and listed convertible debt securities, and commercial papers with ratings. The amount of loan that can be granted to individuals against eligible securities should be capped at ₹1 crore per individual.

The draft also said a bank’s direct capital market exposure, consisting of investment exposures and acquisition finance exposures, should not exceed 20% of its Tier consolidated 1 Capital.

Also, the aggregate CME exposure of a bank, on a consolidated basis, should not exceed 40% of its consolidated Tier 1 Capital as on March 31 of the previous financial year, it added.

One more round of consolidation of PSBs

According to various news reports the Bharatiya government is mulling another consolidation plan in public banking sector by merging several small lenders with large public sector banks. Union Finance Minister Nirmala Sitharaman has said the work for the next round of bank consolidation has begun, underlining “Bharat needs a lot of big, world-class banks”. Speaking at an event of CNBC TV 18, Sitharaman said, “We will need to sit and talk with the Reserve Bank of India (RBI) and banks on how they want to take it forward, and also discuss with the RBI how they want to build larger banks.”

The renewed merger push comes even as it diverges from NITI Aayog’s earlier suggestion to privatise or restructure smaller public sector banks (PSBs) such as Indian Overseas Bank (IOB) and Central Bank of India (CBI), which were identified as potential candidates for strategic sale. NITI Aayog had recommended that only a few large state-run lenders — SBI, PNB, BoB, and Canara Bank — be retained under government control, while the remaining PSBs should either be merged, privatised, or have their government stake reduced. These plans are in line with the Viksit Bharat 2047 vision, and the Union Government hopes the merger process will produce “champion banks” capable of supporting Bharat’s projected rise as the world’s third-largest economy by 2027-28. The phased consolidation is also aimed at creating at least two PSBs capable of ranking among the top 20 global banks. 

While the above proposed measures are a positive sign, the government and the regulator have to address the following major issues on priority basis. 

NPAs

As per the Union government’s disclosure in the Parliament the scheduled commercial banks (SCBs) in the country have written off bad loans (non-performing assets—NPAs) worth a staggering Rs16.35 lakh crore worth of over the past decade (2014-2024).

• Total NPAs Written Off (2014-15 to 2023-24): ₹16.35 lakh crore
• NPAs Written Off in ‘Large Industries and Services’: ₹9.27 lakh crore
• Top Year for Write-offs: 2018-19, with ₹2.36 lakh crore written off

In response to a Right to Information (RTI) query by Praful P. Sarda, a civil rights activist, RBI informed that Bharatiya banks have written off loans worth Rs 16,61,310 crore since April 1, 2014. The breakup of the write-offs by bank category wise is- Public sector Banks Rs.12,08,621 Crs, Private sector Banks Rs. 4,46,669 Crs, Urban Cooperative Banks Rs. 6,020 Crs. This said data extends to September 30, 2024, indicates that only Rs 2,69,795 crore of this amount has been recovered. It is noteworthy here that recovery rates remained low across all the sectors. The recovery by bank category wise is – Public sector Banks Rs 2,16,547 Crs, Private Sector Banks Rs.53,248 Crs. Which means, Rs 13,91,515 crore are still unrecovered which makes the overall recovery rate stand at roughly 16%. 

Innovative approach in revival of NPA accounts of genuine borrowers

• Banks may use the data analytics to leverage on their database to identify the new suppliers and customers and connect them to the NPA accounts of genuine borrowers, so that the revival and recovery of such NPA accounts becomes much easier and faster, compared to the conventional approach of restructuring which is limited to financial aspects alone. 

Recovery of dues through legal mechanism

Banks continue to pursue the recovery of dues through legal mechanisms such as civil courts, debt recovery tribunals (DRTs), and the national company law tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC).

Year wise data of average time taken for resolution at NCLT

(data provided by the corporate affairs ministry in the Parliament on 6th August, 2024.)

19,770 cases were pending before NCLT as on June 30. 2024. Out of the total, 10,125 cases were pending for more than a year. At the end of June 30, 2024, as many as 3,019 cases were pending before the National Company Law Appellate Tribunal (NCLAT) and out of them, 1,356 cases were pending for over a year. Average resolution time: For 2023-24, average resolution took ~716 days; recovery ~27 % of admitted claims. According to a summary from Insolvency and Bankruptcy Board of India (IBBI) / other sources: “as of April 2025, more than 3,400 companies have been resolved under IBC, with a recoverable value of ₹3.58 lakh crore”. The recovery rate under IBC (cumulative) is shown estimated as~32.1% of admitted claims since inception. 

During the financial year 2023-24 the government has made a total of 12 amendments to various regulations and model bye laws were carried out, thereby bringing about 86 changes in the regulatory framework to further strengthen the insolvency resolution process. Inordinate delay in filling up the vacancies of NCLT, DRT members is one of the main reasons behind the pendency of the cases for resolution beyond 400 days. Though the Supreme Court has issued directives on a number of occasions for filling up the vacancies of the members of these tribunals on timely basis, the things have not improved significantly.

Improving recovery from the Insolvency and Bankruptcy Code (IBC) mechanism requires a multi-pronged approach involving legal, procedural, and structural reforms. Technology can be leveraged to improve the processes involved in the resolution of the stressed assets as under: 

Promoting Digital & Tech-Driven Solutions

• Using AI & Data Analytics: Implementing AI-driven tools for tracking insolvency cases and predicting distressed firms before bankruptcy.
• Online Case Management: Ensuring digital submission and tracking of insolvency cases to reduce paperwork and procedural delays.

Bad Bank 

Bharat has formally created a “bad bank” vehicle- National Asset Reconstruction Company Limited (NARCL) in October, 2021 to help banks clean up large stressed assets. The main objective of the bad bank is to achieve a turnaround of the bad loans, preferably as a going concern and not through liquidation proceedings unlike in the case of NCLT under IBC mechanism. 

The mechanism is operational, some large accounts have been transferred, but the scale and pace are still modest compared to ambition. The stated target for NARCL was to acquire stressed assets worth about ₹ 2 lakh crore (≈ ₹ 2 trillion) by FY26. As of July 2024, NARCL had aggregated debt of about ₹ 62,000 crore across 18 accounts, and resolution plans for 2 accounts worth ~₹ 33,000 crore had been approved.

Key hurdles persist around bank willingness, valuations, guarantees, resolution effectiveness. If addressed, the bad bank concept can help further strengthen bank balance sheets and free up credit for growth. 

Wilful defaulters 

There is a set pattern in case of influential wilful defaulters who are able to either delay the liquidation process or leave the country to unknown destinations. It requires political will and effective coordination among various agencies/ institutions to address this challenge. As of March 2014 there were about 5,090 wilful defaulters with outstanding amount about ₹ 39,504 crore.

Year-wise Increase in Number of Wilful Defaulters in Public Sector Banks and Private Sector Banks from 2014-15 to 2020-21 (from the Rajya Sabha answer based on data from Reserve Bank of India)

(https://www.data.gov.in/resource/year-wise-increase-number-wilful-defaulters-public-sector-banks-and-private-sector-banks?utm_source=chatgpt.com)

Frauds 

Between June 1, 2014 and March 31, 2023, banks reported around 65,017 frauds involving a total amount of about ₹ 4.69 lakh crore (frauds of ₹1 lakh and above) in the banking system.

According to RBI, frauds mostly occurred in digital payments (card/internet) in terms of number and primarily in the loan portfolio (advances) in terms of value. Card/internet fraud comprised the largest number of cases reported by private-sector banks. Frauds in public sector banks were mainly in loan portfolios.

In order to address this issue of bank frauds the banks need to strengthen the internal control systems, make them functionally autonomous and swiftly initiate legal action against the culprits. With regard to the operational frauds, enhancing the cyber security and creating greater awareness on digital literacy to the customers are essential to mitigate the instances of such frauds. 

Troublesome Banks and NBFCs

In the recent past we have seen banks and NBFCs like- PMC Bank, Yes Bank, ILFS, Devan Housing Finance Corporation getting into deep problems and violation of accounting standards by Indus Ind Bank wherein the derivative losses had been camouflaged. This raises concerns on the quality of regulatory supervision in the banking industry. Incidentally in most of the above cases both RBI and SEBI are the multiple regulators involved, which indicates that there is lack of effective coordination and a cohesive approach when dual or multiple regulators are involved in the supervision of the market players. 

Need for mandatory consultative approach by the multiple regulators

If the regulators adopt a confrontational approach or keep quiet assuming the other regulator would initiate action, then the issue becomes complex. Bharat follows a non-mandatory consultation approach which means that the regulatory bodies have the discretion to engage themselves in consultation with each other or not. Many a times, this results in regulatory vacuum when the multiple regulators do not initiate action on their own and refrain from consultation with one another. Therefore, there is a need for removing this regulatory vacuum by bringing suitable legislation/ amendment to existing Acts, making consultative approach among the multiple regulators as mandatory. This will remove the jurisdictional tussle whenever there is one sectoral regulator like e.g., SEBI and on the other hand a non-sectoral regulator for example; CCI (Competition Commission of India).

Valuation issues in corporate entities

Valuation of any stock, share, debenture, security, Goodwill, asset, liability or net worth of the company are governed by the Companies Act. Similarly, valuation of shares debentures for the purpose of transfer or acquisition that come under ODI, FDI are governed by FEMA guidelines. Valuation issues of listed corporate entities come under SEBI guidelines. Valuation issues of corporates that are under liquidation come under IBC, 2016. Since multiple regulators are involved in the valuation issues in corporate entities as mentioned above, there is a need for consultative approach among the regulators. Making consultative approach among the multiple regulators as mandatory will remove the regulatory vacuum with regard to valuation issues in corporate entities. (Ruchi Soya Industries, Paytm, to quote a few examples). In this context it is noteworthy to mention that merchant bankers who do the valuation, credit rating agencies who evaluate the credit risk and assign ratings and the consultancy firms who prepare the DPRs for the Technical and economic viability study, they all do not have strict accountability. There is a need to enact and enforce strict regulations to bind these players and fix accountability for their conduct or misconduct.   

Corporate governance issues 

Post liberalization, Bharatiya corporates expanding their activities into different sectors, promoters of business organizations taking active part in public life by choosing political path has led to conflict of interest and overreach of corporate sector through political system to exercise influence on the regulators. One of the main reasons behind the mounting NPAs of the Bharatiya banking in general and Bharatiya Public sector banks in particular is the political factor. Needless to mention that regulators must have functional independence as well as financial autonomy. Also, the heads of regulators must have fixed tenure. This will insulate the regulators from political influence and empower them to act with freedom. In this context it is worth mentioning what the Supreme Court said on 2nd March, 2023 while delivering its judgment on the appointment of Election Commissioner, “the means to gain power in a democracy must remain pure and abide by the constitution and the laws. EC cannot claim to be independent then act in unfair. A person in a state of obligation to the State cannot have an independent frame of mind. An independent person will not be servile to those in power.” The above observation of supreme court is equally applicable for all the regulators.

Despite establishment of the Banks Board Bureau (BBB) and various reforms, many of the structural changes envisioned have not been fully implemented. Some of the key gaps:

1. Creation of the BIC / real shift in ownership functions

• • The Nayak Committee had set out a phased process: Phase 1 transfer ownership to Bank Investment Company (BIC); Phase 2 empower boards; Phase 3 let boards fully assume ownership functions. Unfortunately, the BIC is nowhere in the picture yet. Hence, government continues to both own and exert significant influence over PSBs, meaning the “arm’s length” distance remains partial.

2. Board independence / professionalisation

• • The BBB was envisaged to ensure merit-based appointments, but boards of many PSBs continue with significant government/bureaucratic presence and long vacancies. 
  • The full split of Chairman/CEO roles, dominance of independent directors, and truly empowered bank boards is still a work in progress.

3. Autonomy in strategy, operations and capital raising

• • Without ownership being separate from management and the government acting purely as investor, PSBs are still subject to policy mandates, social obligations, directed lending, and control which limit commercial flexibility. For instance, the committee report flagged “dual regulation” (government + RBI) as a concern. 
  • Also, raising capital, managing non-core assets, mergers, strategic initiatives are still heavily conditioned by government decisions.

4. Reduced government stake / transition to investor role

• • The full transition where the government/ministry acts solely as shareholder/investor (not manager) remains incomplete. The move to reduce government equity and withdraw from direct governance is still unfolding. 
  • Political resistance and structural inertia make this a slow process—for example, some political parties oppose reducing government stake below 51 % in PSBs. 

Without addressing the above-mentioned issues, going ahead with the consolidation of PSBs to create few big banks aimed at having at least two PSBs capable of ranking among the top 20 global banks is like putting the cart before the horse and we may only invite banks with big trouble. Let us hope the government and the regulators will deliberate in depth on this issue and take a wise and prudent decision in the days to come.