Indian Government Pushes Back on Central Bank Proposals

By Nikunj Ohri

NEW DELHI (Reuters) – The Indian government is opposing two key proposals from the central bank that would require banks to allocate more funds for infrastructure projects and hold additional liquid assets against online deposits, according to a government source.

Large parts of Asia's third-largest economy rely on bank financing, with lenders' credit growing nearly 14% over the past year.

The Reserve Bank of India (RBI) proposed in May that banks set aside 5% of loans for infrastructure projects that are under construction, raising concerns among banks about the increased cost of funding such projects.

In July, the RBI suggested banks should maintain an additional 5% 'run-off' on digitally accessible retail deposits to better manage risks from heavy withdrawals through internet or mobile banking. This would force banks to hold more liquid assets like government bonds, effectively reducing the funds available for customer lending.

Both proposals remain unimplemented. The federal finance ministry's banking department has, on two occasions, urged the RBI to soften the guidelines, arguing that they could "squeeze credit in the economy," the source indicated.

For the project finance guidelines, the banking department has suggested that the RBI consider a case-by-case approach based on sector risk profiles for determining how much funding banks must set aside.

The source, who wishes to remain unnamed due to the sensitivity of the matter, noted that while high-risk sectors like real estate could have a heightened 5% provisioning limit, sectors like solar and renewable energy should not be required to maintain higher provisions. Additionally, the government has not set a ceiling for the percentage of funds to be allocated.

The regulatory guidelines should balance the credit needs of the economy with the health of the banking sector, the source concluded.

For online deposits, the proposed 'run-off' should apply only to categories experiencing significant withdrawals, not universally across all deposits.