Govt Challenges RBI's Higher Reserve Proposals For Banks
Date
11/22/2024 4:11:02 AM
(MENAFN- KNN India)
New Delhi, Nov 22 (KNN) The Indian government is contesting two significant regulatory proposals from the Reserve bank of India (RBI) that would require banks to maintain higher reserves for infrastructure projects and digital deposits, according to a senior government source.
The RBI's May proposal mandates banks to allocate 5 per cent of loans for infrastructure projects under construction as reserves, reported Reuters.
This directive prompted banks to express concerns to the government about increased funding costs. In a separate July proposal, the central bank suggested banks should maintain an additional 5 per cent 'run-off' provision for retail deposits accessible through digital channels to manage potential mass withdrawal risks.
These measures would compel banks to hold more government securities as liquid assets, potentially constraining their lending capacity.
This comes at a time when bank credit growth has reached approximately 14 per cent over the past year, with large segments of Asia's third-largest economy dependent on bank financing.
The federal finance ministry's banking division has reportedly addressed letters to the RBI on two occasions, requesting modifications to these guidelines, citing concerns about potential credit constraints in the economy.
For infrastructure project financing, the ministry suggests implementing a sector-specific approach based on risk profiles, rather than applying uniform regulations.
According to the government source, while high-risk sectors like real estate could maintain the proposed 5 per cent provisioning requirement, renewable energy and solar projects should be exempt from increased provisioning mandates.
The source emphasised that while no specific ceiling has been proposed for reserve requirements, regulations should balance the economy's credit needs with banking sector stability.
Regarding digital deposits, the government recommends limiting the additional run-off requirements to specific deposit categories prone to substantial withdrawals, rather than implementing a blanket regulation.
Both the finance ministry and RBI have not provided immediate responses to requests for comment on these developments.
(KNN Bureau)
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