After strict regulations in 2023 & 2024, RBI's Policy shift boosts Banking Sector, eases regulations: Report

ANI February 28, 2025 149 views

The Reserve Bank of India has initiated a significant policy shift to support the banking sector after a period of strict regulations. Governor Sanjay Malhotra has implemented measures including liquidity infusion and reduced risk-weights to stimulate credit growth. These strategic changes aim to enhance financial stability and provide relief to banks and financial institutions. The move signals a more supportive approach from the central bank after a phase of regulatory tightening.

"These measures indicate a clear shift in RBI's approach, moving from a tightening phase to a more supportive stance" - CLSA Research Report
New Delhi, February 28: After a period of strict regulations in 2023 and 2024, the Reserve Bank of India (RBI) has now shifted its stance, benefiting the banking sector in a significant way, according to a report by CLSA Research.

Key Points

1

RBI reduces microfinance loan risk-weights from 125% to 100%

2

Repo rate cut to 6.25% provides borrowing relief

3

Liquidity injections support banking sector growth

4

Regulatory norms relaxed to encourage credit expansion

The report highlighted several measures taken by the central bank, including liquidity infusion, a repo rate cut, and relaxation of certain regulatory norms.

The shift began with large liquidity infusions to address the banking sector's liquidity deficit. This was followed by a much-anticipated repo rate cut, which provided relief to lenders and borrowers alike.

Additionally, the RBI indefinitely postponed some proposed regulatory tightening measures, including changes to the Liquidity Coverage Ratio (LCR) norms and provisions on project financing.

Most recently, the RBI has reduced risk-weights on microfinance loans as well as on bank loans to non-banking financial companies (NBFCs).

The report mentioned that the Risk-weights determine the capital that banks need to set aside for different categories of loans. Lower risk-weights free up capital for banks, allowing them to lend more and improve profitability.

According to CLSA, the biggest beneficiary of the reduction in microfinance loan risk-weights is Bandhan Bank.

The risk-weight for microfinance loans has been reduced from 125 to 100 per cent in most cases and to 75 per cent 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 added that since RBI Governor Sanjay Malhotra took charge in December, several steps have been taken to address challenges in the banking sector.

These include a 25 basis points repo rate cut, bringing it down to 6.25 per cent, helping lower borrowing costs. Periodic injection of liquidity through tools like forex (FX) swaps, open market operations, and variable rate auctions. Indefinite deferment 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, encouraging credit growth.

These measures indicate a clear shift in RBI's approach, moving 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 improve overall financial stability.

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Tags:
RBI Banking Sector Sanjay Malhotra Monetary Policy Microfinance NBFC Bandhan Bank
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