Top News

In Franz Kafka's The Trial, Josef K never learns the rule he has supposedly broken, yet finds himself trapped in a maze of clerks, sub-clerks and shadowy authorities. No one intends tyranny, it grows organically from the system's momentum. This is the paradox of regulators. Even well-meaning regulators, driven by asymmetric accountability and fear of type-II errors, drift toward adding rules rather than removing them. Over time, the regulatory state behaves like a self-referential organism, expanding its boundaries to reduce uncertainty, even when that expansion creates more complexity than clarity. Against this backdrop, the RBI has done something almost unimaginable: it has voluntarily shrunk some regulations.

On November 28, the apex bank announced that it has consolidated more than 9,000 circulars, guidelines and instructions into 244 function-wise Master Directions (MDs), a 97% reduction in regulatory clutter.

Across 11 categories of regulated entities, including commercial banks, small finance banks, payments banks, NBFCs, cooperative banks, All-India Financial Institutions, asset reconstruction companies, credit information companies and others, RBI collapsed nearly 3,500 active instructions into coherent MDs while marking 9,445 circulars as ready for withdrawal.

Draft MDs were released for public comment in October, eliciting over 770 submissions. After filtering out suggestions that sought substantive regulatory changes (beyond the scope of consolidation), the RBI finalised a clean, authoritative library of instructions that now replaces decades of overlapping amendments and un-repealed circulars.

This template can be adopted by other regulators. However, it is not easy, as regulators tend to regulate and, in most cases, over-regulate. There are several reasons for this.

Asymmetric accountability Regulators are punished far more severely for failures of omission than for failures of commission. When the political cost of a missed risk is high, rule accretion becomes rational self-protection.

Path dependence and institutional lock-in Bureaucratic systems, once set on a trajectory, reinforce their routines through sunk costs, procedural memory and justificatory narratives, making expansion easier than recalibration.

Knowledge asymmetry vis-a-vis industry In sectors characterised by high technical complexity and rapidly evolving risks, regulators respond to informational disadvantage by erecting broader and more conservative guard rails, a tendency often called 'regulation by approximation'.

Legislative and judicial incentives Statutory mandates often emphasise consumer protection, prudential safety or risk aversion, not efficiency, leading agencies to hedge politically by over-specifying compliance requirements.

Deregulating from within the system is even harder, and there are several reasons for this.

Bureaucracy favour expansion As William Niskanen's theory of bureaucracies shows, agency budgets, staffing and prestige are positively correlated with regulatory scope, making reduction counter-incentivised.

Loss aversion and institutional risk aversion Daniel Kahneman and Amos Tversky's prospect theory applies to regulators too. Removing a rule carries the risk of blame if something goes wrong, whereas adding a rule distributes costs diffusely across society.

Legal entanglement and procedural inertia Once a regulation interacts with multiple statutes, appellate decisions and internal guidelines, removing it requires coordination across agencies, ministries and courts.

Absence of sunset clauses and feedback loops Most rules are designed to be permanent by default, without mandatory review mechanisms, so rules linger long after the original risk has changed or disappeared.

The impact of this regulatory accumulation is multidimensional.

High regulatory density increases transaction costs and compliance burdens, disproportionately affecting small firms.

Regulatory complexity reduces innovation incentives, as excessive ex ante approval requirements suppress experimentation.

It generates interpretive uncertainty, causing firms to over-comply or 'self- censor' activity.

It entrenches incumbents and reduces competition, as complex compliance regimes increase fixed costs that only large players can absorb, leading to market concentration.

It weakens state capacity by diffusing attention. When regulators must enforce thousands of micro-rules, they shift from outcome-based supervision to form-based policing, reducing strategic capability and creating 'regulatory overload'.

Against this backdrop, RBI's move provides a coherent framework for other regulators to adopt. Regulatory consolidation must focus on these steps:

Establish a single, authoritative library of instructions by collapsing all circulars, notifications and amendments into unified MDs organised by function rather than chronology.

Conduct a full audit of the existing rulebook, identifying obsolete, duplicative or superseded provisions, and formally marking them for withdrawal to prevent regulatory sedimentation.

Enable structured public consultations that filter substantive policy changes from clarity-enhancing suggestions, ensuring that consolidation does not become a backdoor for new rule-making.

Embed periodic review mechanisms, sunset clauses, repeal cycles and regulatory impact assessments, so that the rulebook remains contemporary and proportionate.

Internally, agencies must strengthen technical capacity to reduce reliance on over-specification driven by information gaps, while rebalancing incentives so that officials are rewarded for clarity, coherence and proportionality rather than the volume of instructions issued.

Consolidation must be linked to a shift toward outcome-based supervision, which allows regulators to simplify ex ante rules while enhancing risk-based, ex post oversight.