Opinion: RBI empowering banks to lend more

In a bank-driven economy, aspirational growth cannot be achieved without adequate credit flow to all productive sectors

By Dr K Srinivasa Rao

Among other things, the role of banks is crucial for propelling growth and achieving a higher aspirational trajectory. The Reserve Bank of India used the monetary policy on June 6 to provide multipronged policy support to empower banks — steep cut in repo rate by 50 basis points, front-loading lower interest regime, and change of stance of the policy from ‘Accommodative’ to ‘Neutral’ to calibrate the liquidity flows to contain inflationary headwinds.

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Banks are in a comfortable state of liquidity, with the RBI injecting liquidity of Rs 9.5 lakh crore since January 2025. It turned the deficit liquidity position in December 2024 into a surplus by March 2025. The weighted average call rates are now trading close to repo rates.

The central bank also reduced the Cash Reserve Ratio (CRR) by 100 basis points in four tranches, releasing liquidity of Rs 2.5 lakh crore. This can enhance lendable resources and step up credit flow. The CRR cut will further provide durable liquidity and reduce the cost of funding, thereby augmenting faster transmission of monetary policy to the credit market.

Lower interest rates will make repo-linked retail loans cheaper, and even the EMIs of existing borrowers will be reduced. The lower loan servicing burden, following the repo rate cut, continued price stability with inflation below the 4 per cent mark, and increasing net household financial savings — from 4.9 per cent of Gross National Disposable Income in FY23 to 5.1 per cent in FY24 and 6.5 per cent in FY25 — should combine to spur domestic consumption, potentially stimulating growth.

Private consumption and gross fixed capital formation have already grown by 6 per cent and 9.4 per cent, respectively, in Q4 of FY25. These new measures will further boost domestic consumption.

In the near term, loans linked to the repo rate will be repriced, temporarily shrinking interest earnings and reducing the Net Interest Margin (NIM) of lenders until term deposits mature and new deposits are mobilised at lower interest rates. In this milieu, banks must manage interest rate and liquidity risks.

Stronger Banks

Based on the performance data of December 2024, banks are on a sound footing with a Capital Adequacy Ratio (CAR) of 16.43 per cent, far beyond the minimum threshold. Asset quality is improving with gross NPAs falling to a historic low at 2.42 per cent, down from 2.96 per cent in December 2023. Even asset quality slippage ratio is low, indicating robust credit standards.

The return on assets (RoA) is 1.37 per cent, projecting a better profitability, and the return on equity (RoE) is 14.14 per cent. NIM is 3.49 per cent. Liquidity coverage ratio (LCR) is maintained at 130.21 per cent of 30 days’ liquidity needs against the regulatory mandate of 100 per cent. Outstanding credit and deposit increased by 11.03 per cent and 10.18 per cent during FY25, with the pace of deposit growth fast catching up with credit growth. Even banks can collaborate for increased co-lending opportunities with NBFCs for better outreach.

Resilient Economy

The economy is resilient, with the GDP for FY25 ending at 6.5 per cent and GVA reaching 6.4 per cent, supported by the revival of Q4 GDP to 7.4 per cent. The RBI asserted that the domestic economy exhibits strength, stability, and opportunity that the stakeholders can unleash.

• Strength comes from 5 key sectors — corporates, banks, households, government, and the external sector, with their stronger balance sheets.
• Stability flows from three fronts — price, financial, and political.
• Opportunities for investors come from 3Ds — demography, digitalisation, and domestic demand. RBI succinctly puts the reliance of the economy as 5x3x3.

Thus, the Indian economy is capable of withstanding the external sector risks. Notably, the IMF has tapered the outlook of global growth to 2.8 per cent for 2025 and 3 per cent for 2026, well below the historical average of 3.7 per cent recorded between 2000 and 2019. Geopolitical risks and tariff tussles continue to exacerbate the risks of external sector uncertainty. While being watchful about the downside of imported risks, the RBI has empowered the banking system to do more.

Considering the dynamics of the sectoral economy, the RBI maintained its outlook at 6.5 per cent for FY26. It expects average CPI inflation to remain benign at 3.7 per cent, well within the midpoint of the target, down from 4 per cent estimated earlier. Food, fuel, and core inflation are softening, affirming its descent.

Based on the December 2024 performance data, banks are on a sound footing with a Capital Adequacy Ratio of 16.43 per cent — far beyond the minimum threshold — while asset quality is improving, with gross NPAs falling to a historic low of 2.42 per cent 

During FY26, the agriculture sector is expected to remain strong, service sector is expected to continue momentum with the purchasing managers index (PMI) services at 58.8 in May 2025, from 58.7 in April. The manufacturing PMI stands at 57.6, remaining well above the long-run average. E-way bills increased strongly by 23.4 per cent in April, while the GST collections recorded a growth of 16.4 per cent. IIP consumer durables expanded by 6.4 per cent in April 2025.

Credit Flow

In a bank-driven economy, aspirational growth cannot be achieved without adequate credit flow to all productive sectors. Retail lending is equally important to spur various associated industry activity and employment generation. Taking a cue from the policy measures and exploring innate strengths built in the last 3 to 4 years, banks should augment enough resources to increase credit flow.

The advantage of a strong bank network should flow equally well to all sectors. The retail borrowers, the corporate sector, and the manufacturing sector, with a focus on MSME, are needed to galvanise economic activity at the grassroots levels. Lending to the MSME sector needs special attention, where various credit guarantee schemes were envisaged to provide collateral-free loans. Under the revamped PM SVANidhi scheme, lending limits for street vendors have been increased to Rs 30,000.

Empowered banks should harness technology and policy tools to enhance the speed and efficiency of credit delivery to all sectors, enabling the economy to realise its aspirational growth.

(The author is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. Views are his own)