Why RBI must move from Prudential Oversight to Stewardship

The argument in Part I of this series was that the BIS-BCBS framework is gradually evolving beyond rule-based prudential regulation towards a model centred on system intelligence and stewardship. The question for national regulators is, therefore, no longer whether they comply with the international standards, but how effectively they internalise this shift within their own regulatory architecture.

For India, that question has acquired greater urgency. The financial system is larger, more interconnected and functionally diverse. Financial activity now flows through networks linking banks, NBFCs, fintech firms, technology providers, payment systems and digital public infrastructure. In such an environment, financial stability transcends beyond the strength of individual institutions to resilience of the networks, information flows, technological dependencies and institutional linkages.

Against this backdrop, the Reserve Bank of India’s regulatory evolution should be assessed by its ability to adapt and operationalise this emerging system-oriented approach within India's unique financial landscape.

The RBI focus has, indeed, widened progressively. Many seemingly disparate initiatives reflect an underlying coherence suited to a networked, data-driven and technology-mediated financial landscape. Increasingly, it has extended to the relationships, dependencies and channels through which risks can spread across the system.

Next Frontier
Supervision too has become more differentiated, intrusive and forward-looking. Upgraded risk-based supervision, scale-based regulation for NBFCs, stronger governance expectations, operational resilience and conduct considerations gaining importance within the core guiding framework, are some significant examples. Yet, the next challenge is to reorient it towards the financial system as a whole. Despite considerable progress, the supervisory architecture remains largely institution-centric, periodic in nature and focused primarily on entity-level prudential soundness.

Vulnerabilities originating outside balance sheets can spread through outsourcing arrangements, common technology providers, digital platforms and market linkages. If left undetected, localised disruptions can quickly become systemic events despite strong prudential indicators at individual institutions.

The highest supervisory priority should, therefore, be the development of a comprehensive ecosystem-based framework capable of capturing risk transmission across regulated and unregulated entities through network analytics, consolidated supervision and system-wide stress testing.

This will require progress on several fronts. Periodic supervisory reviews should gradually transition to continuous monitoring supported by integrated data architecture, suptech, including, artificial intelligence, and real-time risk indicators. A more intensive and expansive application of Pillar 2 assessments would greatly strengthen supervisory effectiveness.

Technology is no longer a support function sitting behind finance. Increasingly, it is part of the financial system itself. When large segments of the sector depend on the same cloud providers, software platforms or technology partners, an operational failure can quickly become a systemic one. This necessitates regulatory focus on the soundness of shared infrastructure, cyber security and operational continuity at the system level beyond the traditional and institutional operational-risk frameworks. Interconnections among regulated entities, financial market infrastructures and critical service providers must be mapped more systematically.

The quality of supervision will increasingly depend on the quality of information available to supervisors. A financial system that operates in real time cannot be contingent on fragmented datasets collected through disconnected reporting processes. Data must evolve from being a reporting requirement into a strategic regulatory asset capable of generating predictive intelligence and early-warning signals.  Building a more integrated and reliable flow of supervisory information supported by automated regulatory reporting, AI-enabled risk analytics and compute systems is a regulatory necessity beyond operational improvement. Further, without stronger governance, better data lineage frameworks, common data standards and clear privacy safeguards, the promise of supervisory technology will remain largely unrealised.

An important policy question is whether the regulatory perimeter and contingency support mechanisms should eventually extend to systemically important non-financial service providers whose failure could impair financial stability.

Future Ready
A comprehensive regulatory framework for governing Artificial Intelligence deserves particular attention as AI begins to influence decisions once firmly within human control. As its role expands across lending, risk management and market activities, questions of accountability become unavoidable. Algorithms influencing decisions must satisfy that both the outcome and responsibility therefor remain clear and that the process can withstand scrutiny. Absence of appropriate standards or auditability could lead to model bias, opacity, operational failures potentially eroding trust and weakening regulatory oversight.

A comparable evolution is also required in overall governance and accountability implementation. Capital can absorb losses and liquidity can withstand stress, but neither can compensate for weak oversight, poor incentives or flawed judgement. Board effectiveness, robust risk culture, enhanced individual accountability of senior management and key functionaries, and greater ownership of risk outcomes are critical priorities. While embedded in the regulatory framework, rigorous implementation, credible enforcement, and genuine institutionalisation remain key to the prescription.

The resolution framework is another area that deserves continued attention. India has strengthened its approach to dealing with financial distress, particularly through the Insolvency and Bankruptcy Code. Yet, for long, a comprehensive framework for banks and other systemically important financial institutions (SIFIs) remains work in progress.  An effective resolution process for them would improve preparedness before crisis emerges and potentially ensure that individual failure does not threaten wider financial stability.

Climate risk should be viewed through the same lens. It is no longer just an environmental concern but an increasing financial apprehension. Physical and transition risks affect asset quality, collateral values, insurance availability, infrastructure viability and broader financial stability. Integrating climate-related risks into supervision, stress testing and risk management is indispensable to preserving financial resilience in the long-term. 

If Part I described the direction of global regulatory change, Part II argues that India has an opportunity to help shape it. The next phase of RBI regulatory evolution will depend less on adopting new rules and more on building a framework capable of understanding and managing the continuously emerging financial paradigm.  Regulatory agility commensurate with the pace of financial transformation is crucial and requires parallel deepening of capabilities and  expertise across the regulator,  regulated entities and the broader ecosystem of professional advisers and assurance providers that support them. 

That is not a simple task. Yet India's scale, digital public infrastructure and regulatory track record provide a strong foundation. Much of the groundwork has been laid. How effectively RBI converts the idea of system stewardship into regulatory practice will influence not only the resilience of Indian financial system but also India's contribution to the next phase of global regulatory thinking.

This is the concluding part of the series on BIS-BCBS framework.