Indian banks are expected to emerge stronger under the Reserve Bank of India’s (RBI) upcoming regulatory reforms, which aim to bolster the financial system’s ability to absorb shocks and improve long-term stability, according to global rating agency Fitch Ratings. The report, released on Sunday, October 12, noted that the RBI’s 21 proposed measures mark a significant step towards aligning domestic banking regulations with global standards.
Reforms to strengthen financial foundations
Fitch said the reforms, outlined in its analysis titled ‘Indian Banks to Strengthen Resilience Under Central Bank Reforms’, are broadly positive for India’s banking sector. The measures are designed to enhance transparency, improve risk sensitivity and strengthen the operating environment for lenders.
A key part of the plan is the introduction of the expected credit loss (ECL) framework, which will replace the existing incurred-loss model from April 1, 2027. This move, Fitch said, will bring India’s provisioning norms in line with international practice. Banks will also be allowed to phase in the transition gradually, with adjustments permitted until March 2031.
Add Zee Business as a Preferred Source
Marginal impact on profitability
According to Fitch, while the adoption of the ECL framework may result in a modest rise in credit costs, it is unlikely to materially affect the banking sector’s overall profitability. The agency said most Indian banks are entering this reform phase from a position of strength, supported by improved asset quality, healthy capitalisation and stable earnings as of the financial year ending March 2025.
“Banks with stronger capital buffers and prudent risk management practices will find the transition easier to manage,” the report said, adding that the sector’s operating profit to risk-weighted asset ratios are expected to remain broadly stable.
Stronger system for the long term
Fitch highlighted that the RBI’s wider regulatory agenda aims to improve resilience, transparency and governance across the financial system. Although smaller or state-owned banks may face short-term challenges in adapting to the new framework, the reforms are expected to ultimately strengthen the sector’s capacity to manage cyclical risks and absorb credit losses.
