RBI warns banks over aggressive lending amid liquidity surge to prevent future asset quality risks

The Reserve Bank of India cautions banks against lowering loan prices excessively in a high-liquidity environment, aiming to avert future asset quality issues amid intensified competition and interconnected risks with NBFCs.

The Reserve Bank of India has warned banks against cutting loan prices too aggressively, cautioning that a rush to lend in a flush liquidity environment can store up problems for later. According to people familiar with the discussion, senior deputy governor Rohit Jain told bankers in Mumbai on Tuesday that the temptation to chase growth when funding is abundant can push lenders further down the credit spectrum and leave them with weak assets in future.

The warning comes as banks are awash with liquidity after foreign currency non-resident deposits were swapped into rupees with the central bank. Industry reports say the RBI has also drained large sums from the system through foreign exchange intervention and open market operations, underscoring the scale of the surplus liquidity it is trying to manage.

The central bank’s concern is that intense competition on pricing could encourage lenders to loosen standards in order to deploy surplus funds and protect margins. In that scenario, loans booked today to earn enough to cover deposit costs and other expenses could later become sticky assets, a banking term for loans that are slow to perform or difficult to recover.

The caution also lands at a time when banks are looking to expand retail lending, including through links with non-bank finance companies. Business Standard recently reported that the RBI has highlighted concentration risks in such arrangements, noting that a large share of these assets comes from a relatively small group of NBFCs, which can magnify stress if credit quality weakens.