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RBI Warns Banks: Loan Price Wars Risk Future Bad Debt
23 Sep
Summary
- RBI cautioned banks against engaging in loan price wars due to excess liquidity.
- Aggressive lending could lead to 'sticky assets' in the future.
- Banks received significant inflows from FCNR deposits, creating a liquidity surplus.
The Reserve Bank of India (RBI) has issued a warning to banks, urging them to refrain from engaging in a loan price war. This caution arises as banks are currently experiencing a significant surplus of liquidity, primarily due to inflows from foreign currency non-resident (FCNR) deposits. While banks naturally tend to increase lending when flush with cash, the RBI is concerned that this aggressive approach could lead to the accumulation of 'sticky assets' in the future.
Senior RBI officials communicated this concern to bankers, highlighting the potential risks of low-interest lending. Banks have received substantial funds, and while the RBI has absorbed some liquidity through various measures, these are often short-term. The central bank faces a challenge in balancing the cost of liquidity absorption with the risk of worsening credit quality if interest rates remain too low. There is also a regulatory concern about increased lending to Non-Banking Financial Companies (NBFCs), which may on-lend to riskier borrowers.
