RBI Shifts to Outcome-Based Regulations

Mumbai, Aug 20 (PTI) The Reserve Bank is gradually shifting towards principle and outcome-based regulations that will give operational flexibility to regulated entities (REs) and tailor their activities to their unique needs, said central bank deputy governor M Rajeshwar Rao.

There is no perfect regulatory approach, however, principle and outcome-based regulation is generally found to be more suitable for mature markets, he said while addressing the DoPT MDP on Financial Market Regulations at the Indian Institute of Management Kozhikode (IIM-K) on Monday.

Nevertheless, even developed economies use rule-based framework when it comes to safeguarding interests of consumers, he said.

"We, at the Reserve Bank are gradually shifting towards principle and outcome-based regulations, as it gives operational flexibility to the REs for conduct of their operations and tailor their activities to their unique needs, while adhering to the regulatory framework for delivering the outcomes expected from them," Rao said.

The Reserve Bank of India (RBI) uploaded his speech on its website on Wednesday.

The deputy governor noted that regulators are often confronted with complex challenges while framing regulations, necessitating adoption of a forward-looking approach. Addressing emerging risks calls for nuanced and adaptive strategies to ensure resilience.

"Regulators must adopt a more proactive mindset to help build a financial system that is both resilient and adaptable. Being proactive entails embracing innovation and fully leveraging data and technology," he said.

Rao said the regulators need to further leverage technology to enhance their efficiency -- both internal and supervisory, carry out regulatory horizon risk scanning and boost regulatory effectiveness.

Usage of rapidly evolving technologies and collaboration with domain experts is need of the hour for the regulators to stay abreast of the evolving changes in the financial system, he added.

He further said regulators should have a broader vision of enhancing compliance by REs to make it easier for them to comply with regulations. This can be done by simplifying regulations, enhancing their clarity and removing redundancies and duplications.

He added that the RBI has been emphasising on clarity in regulations and has started including examples, FAQs, and illustrations as part of its regulations for the benefit of REs.

"We need to consider the impact regulations can have on one of the most important stakeholders in financial system i.e., consumers. Regulators have remained conscious of the need to empower consumers and safeguard their interests," Rao said.

The deputy governor also emphasised that regulatory policy in the financial sector must strike an optimal balance between the critical need for stability and objectives of fostering innovation, efficiency, and competition.

While it is necessary to minimise systemic risks and protect consumers, it should not discourage creativity, innovation, or healthy market dynamics, he said.

On the other hand, an overemphasis on innovation and competition -- without adequate safeguards -- can lead to financial instability, resource misallocation, and ultimately loss of confidence in the system, he added.