India's Banks Seek RBI Help as Loan Demand Outpaces Deposits

Indian banks are urging the Reserve Bank of India (RBI) to relax several key liquidity rules, a move aimed at freeing up more capital to meet the country's surging demand for loans.

According to sources familiar with private discussions held over the past two weeks, lenders are facing a squeeze as credit growth continues to outpace the rate of new deposits. This highlights a growing challenge for banks trying to fuel momentum in one of the world's fastest-expanding major economies.

The core issue stems from a shift in household savings. Instead of parking money in traditional bank accounts, many Indians are channeling funds into the stock market, depleting a primary source of bank liquidity.

Proposed Changes to Unlock Cash for Lending

To address the funding gap, banks have put forward several specific proposals to the RBI. Their goal is to unlock cash currently held in reserves and bring down their own borrowing costs.

The key requests include:

• Revising Liquidity Ratios: Lenders want permission to count a portion of their Cash Reserve Ratio (CRR) balances—funds they must keep with the central bank—toward their mandatory Liquidity Coverage Ratio (LCR) requirements. This would directly free up funds for lending.

• Accelerating New Bond Rules: Banks are asking the RBI to implement new regulations ahead of the planned April 1 schedule. These rules would allow them to hold fewer government bonds, releasing more capital.

• Easing Infrastructure Bond Terms: They are also pushing for a reduction in the minimum maturity period for infrastructure bonds, which is currently set at seven years. A shorter term would make these instruments a more flexible source of funding.

An RBI spokesperson did not respond to a request for comment on the matter.

The Numbers Behind the Liquidity Squeeze

The pressure on the banking system is evident in the latest central bank data. As of January 15, credit growth stood at 13.1% year-over-year, significantly higher than the 10.6% growth seen in bank deposits over the same period.

This imbalance has driven up the cost of short-term funding for banks. Rates on three-month certificates of deposit, a tool used by banks to raise funds, reached 6.98% on Wednesday. This rate is substantially higher than the yields on government treasury bills of a similar maturity, signaling tight liquidity conditions in the financial system.