RBI Shifts Gears, Eases Banking Rules After 2 Years: CLSA Report

The Reserve Bank of India (RBI) has taken a big step to ease banking regulations, reversing its tight policies in 2023 and 2024. In a report CLSA Research cited in a news article by ANI highlights that the central bank has developed measures like infusing liquidity, reducing the repo rate, and reducing risk-weight norms. These reforms would be of interest to the banking industry by enhancing the supply of credit, augmenting liquidity, and reducing regulatory overhauls on the financial institutions.

Policy Steps taken by RBI

The report points out that the RBI transition started with a series of liquidity injections to deal with the liquidity shortage in the banking sector. This was followed by a 25 basis point repo rate cut to 6.25 per cent. By reducing the cost of borrowing, relief has been given to lenders as well as borrowers, and growth in credit has also been encouraged.

Apart from this, RBI has indefinitely postponed some of the measures for improving regulation. They involve changing LCR guidelines and guidelines on project finance, which would have increased banks' capital requirements. By doing this postponement of guidelines, the central bank has provided banks with greater leeway to use their funds and lend.

Decrease in Risk-Weight Norms

Most striking among the measures is the RBI reduction of risk-weights on bank loans to Non-Banking Financial Companies (NBFCs) and microfinance loans. Risk weights determine the proportion of capital that a bank needs to set aside for different types of loans. By reducing them, banks can free up capital, which in turn allows them to lend more and maintain financial stability.

For microfinance credit, risk weights have been lowered to 100 per cent from 125 per cent in general and 75 per cent from 100 per cent in exceptional cases. For bank loans to NBFCs, risk weights have been lowered by 25 percentage points to pre-November 2023 levels. The reduction is expected to enhance lending to such segments, fuelling growth and financial inclusion.

RBI’s Changing Approach to Regulation

The CLSA report also states that the central bank has become more accommodative to the banking sector after RBI Governor Sanjay Malhotra took charge in December.

Apart from the repo rate reduction and liquidity injection via forex swaps and open market operations, the central bank has also postponed some of the regulatory requirements on a permanent basis, easing the compliance burden of banks. These steps are a dramatic departure from the policy of squeezing in the last two years. Reduction in risk-weightage and relaxing of regulatory requirements is bound to increase credit availability and profitability of banks. Reducing capital requirements will enable banks to expand their loan book without calling for a fresh injection of capital, thereby supplementing credit growth.

Impact on the Banking Sector

By implementing these policy reforms, banks would enjoy more room to lend, reduced compliance costs, and greater profitability. By reducing liquidity ceilings and decreasing risk-weight guidelines, the RBI has created a more favourable environment for banking activities.

The actions have other broader economic effects as well. Increased lending can ease the operations of businesses, spur investments, and encourage economic growth. Lower borrowing costs allow businesses and consumers to acquire credit, and this can cause higher consumer purchases and business expansion.

The CLSA report suggests that this shift in RBI’s approach marks a significant departure from its earlier focus on tightening financial regulations. With the central bank now taking a more accommodative stance, the banking sector is poised for stronger growth, improved financial stability, and increased credit availability.