Banking and Finance Sector - Newspaper Summary

 The sources highlight significant shifts within the Banking & Finance Sector during the October 20-21, 2025 period, characterized by regulatory streamlining, major M&A activity, institutional challenges in public sector banking, and technological advances in financial services. These changes are set against a backdrop of efforts to internationalize the rupee and manage global economic headwinds.

Regulatory and Policy Changes to Enhance Ease of Business

A key development centers on the Reserve Bank of India's (RBI) potential relaxation of rules regarding commercial banks establishing subsidiaries.

• Subsidiary Approvals: The requirement for commercial banks to obtain RBI approval for floating subsidiaries may no longer be mandatory, according to highly placed sources. This streamlining effort is part of the regulator's broader push to enhance the ease of doing business within the financial sector.
• Non-Duplication Mandate: However, the RBI plans to issue draft norms emphasizing non-duplication of business. The intention is that a bank's subsidiary should focus on segments where the parent is not present. For instance, if a parent bank specializes in housing loans, its subsidiary could focus on affordable housing or loans against property.
• Operational Freedom: This potential move is considered a marked departure from current practice, as the RBI has not approved any bank setting up subsidiaries in almost two decades, despite past requests from large private banks for lending and infrastructure finance arms. The final norms aim to provide more operational freedom to banks and Non-Operative Financial Holding Companies (NOFHCs). RBI Governor Sanjay Malhotra affirmed the regulator's stance against micro-managing banks' decision-making. This impending policy shift is already leading some large private banks, such as Axis Bank (via its subsidiary Axis Finance), to consider listing their arms.
• SEBI Regulations: In market regulation, the Securities and Exchange Board of India (Sebi) has proposed amendments to ease norms for the transfer and dematerialization of physical securities executed before April 1, 2019, granting investors another opportunity to regularize these holdings. Additionally, Sebi gave approval for the Initial Public Offerings (IPOs) of several firms, including Asset Reconstruction Company India (ARCIL), which is poised to become the country's first publicly traded Asset Reconstruction Company.

Institutional Changes and Bank Performance

Mergers, Acquisitions, and Capital Adequacy

• RBL Bank Acquisition: RBL Bank experienced a significant surge in its shares (nearly 9%) following the announcement that Dubai-based Emirates NBD plans to acquire a 60% stake through a preferential issue for approximately $3 billion. Analysts view this transaction as highly positive, signaling a "prolonged growth phase" for RBL Bank and mitigating key "tail risk" related to capital adequacy, especially concerning the upcoming expected credit loss (ECL) framework transition.
• ECL Framework Impact: The transition to the RBI-mandated Expected Credit Loss (ECL) framework is anticipated to impact banks' balance sheets. Punjab National Bank (PNB) expects a hit of approximately $1.03 billion (~9,000 crore) by 2031, which corresponds to roughly a 0.85 percentage point impact on its Capital to Risk Assets Ratio. Indian Overseas Bank (IOB) estimates the incremental provisioning impact due to the ECL transition to be around ~2,500 crore to ~2,800 crore.
• M&A Financing Focus: IOB is shifting its focus toward Merger and Acquisition (M&A) financing, a new area opened up by the RBI.

Performance and Strategy

• IDFC First Bank's Improving NIM: The Net Interest Margin (NIM) for IDFC First Bank, which experienced compression after fully passing on the repo rate cut, is expected to improve sequentially starting in Q3 (October–December). The bank reported Q2FY26 NIM at 5.59%. The bank's core profitability improved due to reduced provisions, stable asset quality, and a falling cost of funds. The cost of funds decreased due to a rise in the Current Account Savings Account (CASA) ratio to 50.1%. The bank is expanding into segments like cash management, start-up banking, NRI services, and trade finance, aiming to reduce its credit-deposit ratio (currently 94.2%) to the mid-80s.
• ICICI Bank's Results: ICICI Bank reported satisfactory results for Q2FY26, with net profit rising 5.2% year-on-year to ~12,360 crore, supported by strong margins and lower provisions. Its Gross Non-Performing Assets (GNPA) ratio dropped to 1.58%.

Public Sector Challenges and Financial Inclusion

The efficacy of the government's flagship financial inclusion scheme, the Pradhan Mantri Jan-Dhan Yojana (PMJDY), shows challenges in account utilization.

• Inoperative Accounts: The share of inoperative PMJDY accounts in public-sector banks (PSBs) increased to 26 per cent at the end of September 2025, up from 21 per cent a year ago. This suggests a slowdown in activity within the scheme.
• Specific PSB Inactivity: Bank of India (33 per cent) and Union Bank of India (32 per cent) reported the highest percentages of inactive PMJDY accounts as of September 2025. An account is deemed inoperative or dormant if there are no transactions for over two years.
• Leadership Debate: The government's plan to allow lateral entry from the private sector for senior positions in PSBs aims to inject management dynamism. However, this strategy faces uncertainty due to core differences in institutional values, as state-owned banks prioritize social objectives and public welfare, unlike the profit-maximization instinct often found in the private sector.

Advancements in Financial Technology and Risk

Digital Payments and Products

• Revolut's India Strategy: UK-based Revolut India is prioritizing prepaid cards on the Visa network for both domestic and forex transactions, linking India to global markets like the US, UK, and Singapore. Revolut India plans to acquire 20 million customers in the next five years. By operating as a direct issuer with Prepaid Payments Instruments (PPI) authorization from the RBI, Revolut expects to achieve a higher interchange income compared to co-branded bank cards.
• Credit Growth Engines: Co-branded credit cards (CBCCs) are emerging as a strong credit growth engine in India, with revenues projected to triple by FY28 from the current $17,000–$19,000 crore.

Combating Fraud with Alternative Data

• New Risk Assessment Tools: Risk assessment platforms are increasingly relying on diverse alternative data sources to identify groups attempting credit fraud and to improve underwriting for new-to-credit (NTC) users.
• Data Sources: This alternative data includes location details, third-party app usage, SMS data, payment transaction behavior, and metadata. This approach is vital because comprehensive credit bureau information is often lacking for NTC customers.
• Fraud Detection: Analysis of alternative data patterns can reveal large fraud networks; for example, tracing multiple government IDs linked to several phone numbers and PAN cards. The strategic outcomes expected from using this data include reducing fraud risks and Non-Performing Assets (NPAs), alongside increasing loan approval rates.

Banking & Finance Sector in Macro Context

The financial changes are unfolding alongside significant macro trends:

• Rupee Internationalization: The RBI is actively working toward internationalizing the rupee by facilitating easier settlement for free-trade partners. Steps include establishing direct rupee reference rates that circumvent reliance on a third currency like the US dollar, with initial additions covering the UAE dirham and Indonesia rupiah. This aligns with India’s long-term objective of achieving "developed nation" status by 2047, bolstering the currency's stability, and mitigating vulnerability to external shocks.
• Currency Performance: Despite resilience in the broader Indian economy, the rupee remained under pressure, weakening by 4.38 per cent against the dollar during Samvat 2081. This was primarily attributed to rising global trade tensions and the imposition of reciprocal US tariffs on Indian goods. Amid pressure, the RBI did not buy dollars for the second straight month in August 2025, instead selling $7.6 billion of the greenback.
• Global Headwinds: The RBI's monthly report, "State of the Economy," noted that while India has shown resilience, it is not immune to global headwinds. This caution is reinforced by the fact that net foreign direct investment (FDI) turned negative in August due to increased repatriation and moderating inflows. However, the report highlights that India's strong economic fundamentals include robust balance sheets for banks and companies.