India focuses on cutting back banking supervision: from traditional compliance to business model analysis

Indian regulatory authorities are implementing a profound transformation in their approach to banking supervision. According to sources reported by Jin10, the Reserve Bank of India is shifting its focus from checklist-based controls to a much more detailed assessment of banks’ operational processes and business strategies. This evolution represents a paradigm shift in regulatory policy, aiming to capture systemic risks that elude traditional methods.

Systemic Pressure: Why the RBI is Rethinking Supervision

India’s banking sector is experiencing unprecedented growth, exerting significant pressure on regulatory tools designed for a less complex environment. Incidents of mismanagement at prominent institutions, such as IndusInd Bank, and the collapse of New India Cooperative Bank have exposed the structural limitations of conventional supervision. These failures demonstrated how periodic financial snapshots can conceal critical vulnerabilities if not accompanied by in-depth analysis of underlying operational models. The RBI has recognized that passive monitoring of accounting data is insufficient to prevent emerging risks in a rapidly expanding banking system.

From Compliance Checklists to Operational Scanning: the RBI’s New Approach

The reform strategy proposed by the RBI involves comprehensive assessments of banks’ management practices, going beyond the isolation of financial reports during routine inspections. This approach allows inspectors to gain a more nuanced understanding of the operational health of institutions, identifying discrepancies between financial performance and vulnerabilities hidden within processes. The supervision overhaul thus translates into a more targeted and risk-aware investigation, rather than mechanical adherence to standardized parameters. The proposal is still under review and may undergo further refinements before final implementation.

Cybersecurity Challenges in the Indian Banking System

A key element of the regulatory overhaul concerns expanding the RBI’s workforce, with a particular focus on hiring cybersecurity specialists. The risks associated with the digitization of India’s banking system have become a strategic priority. Cyber threats, infrastructural vulnerabilities, and the increasing sophistication of attacks pose challenges that traditional supervision methods are ill-equipped to handle. The RBI recognizes that strengthening internal expertise in digital security is essential to providing effective oversight in an increasingly automated and interconnected banking ecosystem.

Lessons from Failures: Governance Shortcomings the New Approach Aims to Prevent

Documented governance crises in the past highlight how reliance on periodic financial snapshots can be misleading. Healthy balance sheets often mask operational deterioration, concentrated risks, or conflicts of interest that only emerge through structured analysis of decision-making processes and organizational dynamics. The RBI’s new supervision approach aims to bridge these gaps by introducing inspection practices that assess banking health from multiple perspectives: quantitative data, operational processes, managerial competencies, and risk culture. This multidimensional approach should make the Indian banking system more resilient and transparent.