M Rajeshwar Rao, Deputy Governor, Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) gradually shifts to principle and outcomes-based regulations, because it provides operational flexibility to the regulated entities (RES) for performing their activities, according to vice-governor M Rajeshwar Rao.
This regulatory approach also puts RES (such as banks and non-bank financing companies) activities on their unique needs, while adhering to the regulatory framework for delivering the expected results of them.
“There is no perfect legal approach, but the principle and outcomes -based regulation appear to be generally more suitable for adult markets.
“Nevertheless, even developed economies that use rules -based framework when it comes to guaranteeing the interests of consumers,” Rao said in his inaugural speech on the Dopt MDP about the financial market regulations at the Indian Institute of Management Kozhikode (IIMK) on August 18.
He noted that principles -based regulation are qualitative and uses high -level statements with a declaration of the underlying intention. It gives flexibility and freedom to innovate without being limited by prescriptive rules.
However, it is open to subjective interpretation and can therefore be challenges for both RES and supervisors, which limits enforcement and accountability.
“It can also be less effective in areas such as consumer protection, where clear and useful directions are essential. In the context of Reserve Bank as a banking line, the prudential ramework for resolution of atressed assets is an example of regulations -based regulations,” said the deputy gouzerneur.
On the outcomes -based regulations
Outcomes -based regulation focus on the desired results or results instead of prescribing specific processes and tools.
Rao said that this approach is ‘what’ sets up is the desired result, while offering flexibility on ‘how’ achieved this. The instructions of the RBI on digital loans emphasize the desired result, that is, transparency and fairness for borrowers, instead of getting into details such as loan percentages or methods.
Regulation based
Rules -based Regulation requires that a RE meets specific, prescribed requirements.
The deputy governor noted that this approach leads to a better clarity, compliance and consistency, because it simplifies the understanding of regulations for both a RE and the consumer.
However, it can lead to a ‘check-the-box’ mentality, resulting in compliance by RES in letter but not in spirit.
“The RES can also be confronted for challenges in dealing with complex and dynamic issues that require nuanced judgment. The master directions about the loans of the priority sector goals and classification can be considered an example of a regulation based by the bank,” he said.
RAO emphasized that the regulatory policy in the financial sector should find an optimal balance between the critical need for stability and objectives of promoting innovation, efficiency and competition.
“Although it is necessary to minimize systemic risks and protect consumers, creativity, innovation or healthy market dynamics should not discourage,” he said.
On the other hand, an exaggerated emphasis on innovation and competition – without adequate guarantees – can lead to financial instability, incorrect allocation of resources and ultimately loss of trust in the system, RAO warned.
“Finding this right balance is particularly important for India, given the enormous size and heterogeneity of economy, growing ambitions and substantial investment needs to maintain high growth and development. Supervisors must consistently strive to achieve this balance,” he said.
Published on August 20, 2025
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