Lenders Ask RBI To Relax Liquidity Rules Amid Growing Loan Demand

Banks Seek More Headroom To Lend

Indian lenders have asked the central bank to ease certain liquidity rules to unlock additional funds for credit growth, according to people aware of the discussions. The request comes at a time when loan demand remains strong across retail, small business and infrastructure segments, while deposit growth has been relatively slower. This gap has tightened liquidity conditions for banks and increased their reliance on costlier short-term funding.

Cash Parked With RBI Under Review

Banks are seeking permission to free up a portion of the money they are required to park with the RBI to meet short-term stress requirements. They have proposed that a larger share of balances maintained under the cash reserve framework be allowed to count towards liquidity coverage needs. Such a move would reduce idle funds and make more capital available for lending. According to market participants, this could help ease borrowing costs and improve credit transmission to the broader economy.

Faster Rollout Of New Liquidity Rules Sought

Lenders have also requested an early implementation of revised liquidity norms that would allow them to hold fewer government bonds. The updated framework, currently scheduled to take effect from April 1, is expected to reduce the mandatory stock of low-yielding assets. Advancing the rollout could immediately release additional cash for productive lending.

Pressure From Deposit Growth Lag

Recent trends show deposits are not keeping pace with credit. Bank deposits grew around 10.6% year-on-year, while credit expanded roughly 13.1% over the same period. The mismatch has increased funding pressure, pushing banks to tap short-term instruments such as certificates of deposit at relatively higher rates.
As a result, the cost of funds has edged up, potentially affecting lending rates and margins.

Other Suggestions On Funding

Banks have further sought flexibility on infrastructure bonds. They want the minimum maturity requirement reduced from seven years, which would make such bonds more attractive and enable quicker fund-raising. Shorter tenures could broaden investor participation and improve liquidity in these instruments.

What It Means For The System

If the RBI allows limited relaxation, banks could gain additional capacity to extend loans without materially raising their funding costs. This may support sectors reliant on bank credit, including housing, small enterprises and infrastructure projects, especially at a time when the economy continues to see steady demand for financing.
For now, discussions remain ongoing, and no formal decision has been announced. Markets will watch for any regulatory changes that could influence liquidity conditions and bank lending behaviour in the coming months.