Indian banks have sought relaxation in liquidity regulations from the Reserve Bank of India, citing a widening gap between credit demand and deposit growth. According to banking sector sources quoted by Bloomberg, loan demand has remained elevated while deposit mobilisation has slowed, limiting the availability of funds for lending.
Banks have told the central bank that a growing share of household savings is moving into equity markets and other investment avenues, reducing traditional bank deposits. As a result, banks are facing constraints in meeting credit demand with existing funding.
To address this, banks have requested permission to deploy a portion of cash currently maintained as buffers for short-term stress toward lending activities. Sector sources said banks want a larger share of funds kept under the cash reserve ratio to be considered eligible for inclusion in the liquidity coverage ratio, which would increase lendable resources and reduce borrowing costs.
Bankers said such a change would allow them to extend more loans and meet rising credit demand. They also said this would help maintain balance in the domestic credit market and support economic activity.
Banks have also asked the RBI to consider advancing the implementation of revised liquidity norms. Under the proposed rules, banks would be required to hold a lower amount of government bonds, freeing up additional cash for lending. According to sources, the revised norms are scheduled to take effect from April 1.
In addition, banks have suggested reducing the minimum maturity period for infrastructure bonds. The current minimum maturity stands at seven years, and banks believe a shorter tenure would help them raise more funds through these instruments and enhance lending capacity.
Latest central bank data show that as of January 15, bank deposits grew 10.6% year-on-year, while credit growth stood at 13.1% over the same period. The data indicate that loan growth continues to outpace deposit growth, increasing funding pressure on banks.
Due to this imbalance, banks have increasingly relied on short-term funding instruments such as certificates of deposit. The interest rate on three-month certificates of deposit stood at 6.98% on Wednesday, significantly higher than the yield on government treasury bills of comparable maturity, indicating higher costs for short-term borrowing.
Bloomberg reported that the RBI has held meetings with several banks over the past two weeks, during which lenders presented their requirements and proposals. The timing and extent of any regulatory changes will depend on the central bank’s decision.
