From Capital Controls to Capital Confidence: RBI’s New Global Playbook

Introduction

India’s banking system is changing quietly but decisively. Over the past year, several mid-sized lenders - RBL Bank, Yes Bank, Federal Bank, and IDFC First Bank - have seen major foreign investors enter their ownership structure. The latest is a Blackstone affiliate buying almost 10% of Federal Bank. There are also recent reports of the government’s plan to raise the FDI cap in PSU banks to 49%.

At the same time, the Reserve Bank of India (RBI) has proposed broad changes to the External Commercial Borrowing (ECB) framework. The new draft expands who can borrow, from whom, and for what purposes. Currency rules and documentation are also being simplified.

Together, these moves suggest a shift in philosophy. For decades, the RBI focused on shielding banks from global capital. Today, it is doing the opposite: inviting foreign capital in, but under clear supervision.

For lenders, this is not a headline to scroll past. It changes how they fund themselves, compete, and manage risk in the coming decade.

From Capital Controls to Capital Channels

India’s financial rules were once built around protection. Foreign ownership in banks was capped near 15%. Borrowing abroad was allowed only for specific uses and under strict conditions. The aim was to guard against external shocks and defend the rupee.

Now the framework is being re-engineered. The RBI is moving from control to coordination. It is allowing capital to flow through, not around, India’s system.

The RBI’s draft ECB framework suggests further changes to reinforce this shift:

• Higher limits: Borrowers may raise up to the greater of USD 1 billion or 300 percent of net worth.

• Market-linked pricing: Interest costs will now be set by markets rather than capped by RBI.

• Simpler maturity norms: Most loans will follow a uniform three-year minimum, reducing procedural friction.

• Greater currency flexibility: Borrowers can choose or convert between rupee and foreign-currency denomination more freely.

Together, these measures turn external borrowing into a more practical and responsive source of capital for Indian lenders.

Parallelly, RBI’s relaxation on overseas perpetual debt means banks can raise AT1 capital from international markets, adding a non-dilutive route to bolster core capital. This is not deregulation. It is supervised openness - global capital flows in, but RBI keeps the gate.

The Macro Motive – Building Capital Confidence

The timing is deliberate. Credit demand in India is growing faster than deposit growth. MSME and retail lending both need deeper funding pools. At the same time, the rupee faces pressure from global rate cycles.

By liberalising capital inflows and foreign ownership, RBI seeks to achieve two goals:

• Strengthen the rupee: Greater inflows of foreign capital can balance current account pressures and build investor confidence.

• Deepen credit capacity: Expanded borrowing channels allow lenders to meet rising loan demand without over-relying on domestic deposits.

The idea is to build resilience, not dependence. Global capital is being used to strengthen liquidity and confidence in India’s banking system.

Risks Beneath the Reforms

However, greater openness brings not only opportunity but also new forms of exposure. The main macro-financial risks that can emerge include:

• Capital-flow volatility: Global interest-rate or sentiment shifts can reverse inflows, weaken the rupee, and tighten liquidity.

• External debt buildup: More offshore borrowing increases rollover and refinancing risk if global credit conditions tighten.

• Asset-price pressures: Cheap foreign liquidity can inflate valuations in sectors like housing and NBFC lending, creating mini-bubbles.

• Crowding in credit allocation: Cheaper offshore funding could shift lending toward large corporates and urban borrowers, leaving smaller segments more reliant on costlier domestic funds.

• Fiscal spillovers: RBI may need to sterilise inflows to stabilise the rupee, temporarily increasing short-term borrowing costs for government and corporates.

What This Means for Banks and NBFCs

For lending executives, overall, the shift brings real operational and strategic consequences.

A. Broader and cheaper funding sources: Global investors and ECB lines can lower the marginal cost of funds, especially for highly rated institutions. This can enhance spreads and support new product rollouts.

B. Competitive benchmarking: Foreign-controlled banks and PE-backed lenders will bring global standards in risk modeling, customer experience, and governance. Domestic lenders must respond with speed, technology, and discipline.

C. Treasury and risk exposure: Offshore borrowing increases exposure to currency and interest-rate swings. Treasury desks must adopt robust analytics, hedging frameworks, and liquidity buffers to manage these new variables.

D. Partnership opportunities: Relaxed on-lending rules and foreign participation open new forms of collaboration between banks, NBFCs, and fintechs. Co-lending and structured funding can link global liquidity to domestic lending at scale.

The Structural Transition and Challenges of Global Capital

This policy shift is changing how Indian lenders are funded. In the old model, domestic deposits were the main source of money. Now a three-layer funding stack is emerging:

• Domestic capital for foundational stability.

• Foreign equity from strategic or PE investors for strength and capital buffers

• External borrowings (ECBs) for liquidity and scale.

This structure spreads funding risk across tenors and geographies but brings new challenges:

• Potential currency mismatches if borrowing and lending currencies differ.

• Cross-border compliance with anti-money-laundering and capital adequacy standards.

• Need for real-time exposure visibility across subsidiaries and funding sources.

Institutions that treat this as a funding change alone may fall behind. Those that use it to upgrade governance and data systems will gain a long-term advantage.

The Road Ahead – Guidance for Lending Leaders

At this point, the goal for leadership teams is not to react, but to realign. The path ahead can be shaped around three broad priorities:

1. Rethink the capital structure: Review the funding mix. Use new flexibility to balance cost, duration, and currency risk. Build buffers before volatility returns.

2. Strengthen governance and visibility: A globalised balance sheet requires better data discipline, treasury analytics, and board-level transparency. The focus must move from compliance reporting to proactive risk sensing.

3. Build agility through technology and integration: Technology is no longer a support function. It is the backbone for managing capital complexity.

OneFin’s platform is a perfect complement to this transition through:

• Modular, low-code architecture for quick rollout of new loan products and workflows.

• API-first integrations with 70+ external systems, connecting lenders to bureaus, banks, and payment networks.

• Unified origination, management, and collection systems that combine growth with control.

• Risk and compliance orchestration that embeds regulatory discipline into everyday processes.

  
  

These capabilities allow lenders to stay nimble as funding sources diversify and regulations evolve.

Conclusion – Openness as a Strength

India’s financial regulators are rewriting the old rulebook. Instead of guarding against foreign capital, they are learning to guide it.

For lenders, this opens new paths to lower funding costs, stronger governance, and deeper partnerships. But it also demands a higher standard of transparency, technology, and risk control.

Those who modernise early will not only manage this new openness but use it to grow. The question for lenders is no longer whether to engage with global capital, but how to do it responsibly and at scale.

To know more about OneFin, schedule a Demo.