New Delhi [India]: Following a period of stringent regulations in 2023 and 2024, the Reserve Bank of India (RBI) has now adopted a more accommodative stance, significantly benefiting the banking sector, according to a report by CLSA Research.
The report outlines several key measures introduced by the central bank, including liquidity infusion, a repo rate cut, and relaxation of certain regulatory norms.
The shift in policy began with large-scale liquidity infusions aimed at addressing the banking sector’s liquidity deficit. This was followed by a highly anticipated repo rate cut, providing much-needed relief to both lenders and borrowers.
Additionally, the RBI has indefinitely deferred proposed regulatory tightening measures, such as revisions to the Liquidity Coverage Ratio (LCR) norms and provisions related to project financing.
In its latest move, the central bank has reduced risk-weights on microfinance loans as well as on bank loans to non-banking financial companies (NBFCs).
The report explains that risk-weights determine the capital that banks must set aside for different types of loans. Lower risk-weights free up capital, enabling banks to increase lending and improve profitability.
According to CLSA, Bandhan Bank is expected to be the biggest beneficiary of the reduction in microfinance loan risk-weights. The risk-weight for microfinance loans has been reduced from 125% to 100% in most cases and to 75% in some eligible cases. Similarly, risk-weights on bank loans to NBFCs have been cut by 25 percentage points, bringing them back to pre-November 2023 levels.
The report also notes that since RBI Governor Sanjay Malhotra took office in December, several initiatives have been implemented to strengthen the banking sector.
Key measures include:
- A 25 basis points repo rate cut, bringing it down to 6.25%, reducing borrowing costs.
- Regular liquidity injections through tools such as forex (FX) swaps, open market operations, and variable rate auctions.
- Indefinite postponement of proposed LCR and standard asset provision guidelines, easing regulatory pressure on banks.
- Reduction in risk-weights on microfinance loans and bank lending to NBFCs, fostering credit growth.
These measures indicate a clear policy shift by the RBI, transitioning from a tightening phase to a more supportive stance for the banking sector. The relaxed regulations and increased liquidity are expected to enhance credit availability and strengthen overall financial stability.