RBI's New Rule to Unlock ₹3 Trillion May Spur Bank Lending by 2%

The Reserve Bank of India (RBI) has announced a significant relaxation in liquidity rules for banks, which is expected to unlock around ₹3 trillion ($35.24 billion) in capital. This move could potentially boost credit growth by as much as 2% points, offering much-needed support to India's banking sector which has been witnessing slowing credit expansion. The central bank has revised its guidelines on the Liquidity Coverage Ratio (LCR), a requirement that mandates banks to hold high-quality liquid assets (HQLAs) such as cash, central bank reserves, and government bonds to cover short-term obligations. The key change is the reduction in the proportion of these HQLAs that banks must hold against digitally linked deposits.

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Analysts believe this step could free up a substantial portion of banks' currently locked assets, turning them into lendable resources. India’s banking system currently holds an estimated ₹45–50 trillion in HQLAs. With the relaxation, banks could gain access to an additional ₹2.7–3 trillion for lending purposes. According to a well known rating agency's expert analyst, this may directly translate into a 1.4–1.5% point increase in credit growth. Macquarie and Morgan Stanley analysts have also echoed similar sentiments, projecting credit growth acceleration between 1.4% and 2% as a result of this move.

The RBI clarified that these new norms will come into effect from April 1, 2026—one year later than initially proposed. However, banks are already in a strong position, with most maintaining an LCR of 115% to 130%, well above the minimum requirement of 100%. This gives lenders a comfortable cushion before the new rules are implemented. Morgan Stanley added that banks could start seeing marginal improvements in their earnings even before 2026, estimating a 2 to 4 basis point increase in their margins.

This policy shift comes at a time when India's credit growth has been losing momentum, falling for eight straight months through February. HSBC recently cut its credit growth forecast for the previous fiscal year from 12.5% to 11.5%. The RBI’s updated LCR framework is thus aimed at injecting liquidity into the system and encouraging more active lending, ultimately supporting the broader economic growth agenda.

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