Industry Odisha Bureau, Sep 23: RBI has warned banks against an aggressive loan price war. Surplus liquidity from FCNR inflows is testing lending discipline across the sector.
Indian banks are sitting on unusually high liquidity levels. The RBI has warned against a resulting loan price war. FCNR-related inflows have swelled bank balance sheets significantly. This surplus now tests lending discipline across the banking sector.
Surplus Liquidity Tests Bank Lending Discipline
Banks received fresh FCNR-related inflows worth around ₹11 lakh crore. Such liquidity often pushes lenders toward aggressive loan growth. Banks may compete harder for borrowers under these conditions. That competition could involve lower pricing or looser underwriting. The RBI worries this may weaken credit quality over time.
RBI Absorbs Liquidity Through Multiple Channels
The central bank has already absorbed significant surplus liquidity. Close to ₹2.5 lakh crore came through foreign-currency intervention routes. These included currency swaps and spot dollar sales. Another ₹3.5 lakh crore was absorbed through separate operations. Bond sales and reverse repo borrowing formed key channels here. Some of these measures remain temporary in nature though. Liquidity could return to markets as reverse repos unwind.
Loan Competition Raises Credit-Quality Concerns
RBI deputy governor Rohit Jain raised this concern directly. He warned banks against an emerging loan price war. Aggressive lending could push banks down the credit matrix. Over time, this risks creating what officials call sticky assets. The warning reflects concern over lending discipline, not current defaults.
Retail Credit Trails Overall Loan Growth
Retail credit grew 16% year-on-year, according to sector data. Overall credit growth remained just below 19% for comparison. Banks are betting retail demand will strengthen further ahead. A banker noted returns require roughly 2.5% loan mark-ups. Net interest margins near 3% remain necessary too, they said.
NBFC Lending Draws Regulatory Attention
Loans to NBFCs are growing at a notably faster pace. Regulators remain watchful of this lending channel specifically. NBFCs and fintech firms may then on-lend to borrowers. Some of those borrowers’ creditworthiness could raise separate concerns. This chain of lending adds another layer of scrutiny.
Liquidity Complicates RBI Monetary Policy
The liquidity situation coincides with an upcoming MPC decision. Members reportedly agree broadly on the need for higher rates. Timing remains the key question under active discussion. The US Federal Reserve’s recent rate hike adds further context. Officials also want to avoid disrupting festival-season consumption patterns.
RBI Balances Liquidity Against Lending Discipline
Jain also flagged unsettled cross-border trades needing resolution. New trade-payment rules take effect from October 1 onward. RBI urged simpler processes for foreign portfolio investors too. Wider retail access to forex and government securities was discussed. The central bank now faces a delicate balancing act. Liquidity must be managed without compromising long-term lending discipline.
