Liquidity remains a concern, cash reserve ratio tweak may help: Dinesh Khara

While the Reserve Bank of India (RBI) has already made several adjustments, liquidity remains an area of concern, says Dinesh Khara, former Chairman of State Bank of India.

“One possibility that has been discussed is a potential relaxation in the CRR (cash reserve ratio) in the coming months to ensure durable liquidity in the system. That could be something to look out for,” he said in a discussion with CNBC-TV18 on the RBI’s recent measures to boost liquidity.

CRR is the percentage of a bank’s total deposits that it must maintain with the central bank in the form of reserves.

On the revised liquidity coverage ratio (LCR) norms, Khara said rate cuts were already in place, and easing liquidity was necessary to ensure effective transmission.

Reserve Bank of India Governor Sanjay Malhotra had recently pointed out that the dwindling liquidity in the call money market poses a risk to effective monetary policy transmission.

Surplus liquidity in India has averaged ₹1.7 trillion ($20 billion) per day this month, reversing a four-month deficit, as the central bank stepped up liquidity infusions to support growth.

Also Read: RBI Governor warns of dwindling money market liquidity

Sanjiv Chadha, Former MD and CEO of Bank of Baroda, highlighted that the RBI’s recent actions are in line with what a central bank should do—respond to stress in a way that supports growth.

He explained that tight liquidity conditions had made it harder for banks to function smoothly, especially when deposit growth was slowing. Easing those pressures was important not just for the health of the banks, but also to make sure that rate cuts by the RBI actually reach borrowers.

Also Read: RBI’s new LCR norms: What changes and who will be affected

These are verbatim excerpts of the interview.

Q: It has been a very swift change in the regulatory backdrop, where a lot of the macroprudential tightness that we saw in the last 15 months has been pulled back, whether it’s unsecured retail credit, risk weights, or the latest liquidity coverage ratio (LCR) guidelines. There has been enough comfort; the implementation is also one year away now. What do you make of Sanjay Malhotra’s first three months in office?

Khara: The way I read this situation is that the industry was always reaching out to the Reserve Bank of India (RBI) and was making a significant appeal in terms of ensuring that liquidity should not become a challenge—particularly, I am talking in the context of LCR. I am glad that the guidelines which have come in represent a middle path. If at all, you look at it—compared to what it was and what it will be from the April 1, 2026—it’s more like a middle path. That is a very clear reflection that the RBI has probably given due credence to the submission made by the industry and the industry bodies, and has also tried to figure out how they should balance the risks that are inherent in this.

I would say that it has always been a collaborative approach. But, as a regulator, they are very mindful of the situations currently prevailing, and based on that and whatever elbow room is available, I would say that they are willing to accommodate the banking system.

Very mindful of the fact that growth is the need of the hour, and unless and until the banking sector is given the required support, growth may not really happen. And that is perhaps the reason why RBI has also taken a stance which is supportive of the banking requirements.

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Q: The RBI usually errs on the side of caution. Just your thoughts on the pullback in the tightness around unsecured lending? Like I said, some of the risk-weights that were increased for NBFCs have now been rolled back. On the unsecured bit do you think this was the right time to ease up norms a little bit and what would you expect in terms of a pickup in unsecured credit?

Khara: The way it is by virtue of tightening the unsecured credit, it started impacting the growth path. So naturally, here also the RBI was required to find a middle path, and that is one of the reasons why they have left the micro-management of the risks related to unsecured credit at the level of the banks’ boards. But overall, they have given some elbow room which is addressing this particular aspect.

The other aspect which I must mention—it’s not merely the risk-weighted assets (RWAs) which has been reduced—but also to support the whole ecosystem, the co-lending requirements have been relaxed now, that makes the availability of credit at the ground level much easier. Because today NBFCs can do co-lending with other NBFC players, NBFCs can do co-lending with banks, and even banks can also do the co-lending. Among themselves, they have broadened the whole base.

I would say that the reduction in RWA was essentially just one step, but the direction is very clear—how can we make credit available on the ground without much cost? So that seems to be the intention, and that is the reason why the RWAs have been relaxed a bit. Also, a very positive co-lending environment has been created. Nevertheless, managing the risk is something which is the role of bank managements. And for that matter, the boards of the banks have a greater responsibility. I expect that the board will take the appropriate call depending on the area where they are operating, the products they are offering, and how they should act.

Q: Can we say, in the context of what we have seen from the RBI under the Governor over the last three months, that there is a shift towards growth in a big way? Just take the LCR, for example. The run-off at 100%—banks were arguing—was punitive. But the very sharp reduction that we have seen perhaps lies on the other end of the spectrum. What do you say as an indication can we say its very growth-focused now? Mr. Chadha, you want to come in?

Chadha: I think central banks generally want to be counter-cyclical. If there is stress building up in any area, they would want to mitigate the stress rather than accentuate the same. We know that there was tightness in liquidity. We know deposit growth was slowing down and therefore, if the draft guidelines of the LCR had come into effect, that would have been pro-cyclical rather than counter-cyclical. One can argue that this is very much in line with the mandate of a central bank -that’s one.

Number two—in the specific context of the Indian economy—we know that, unlike say the US, the Indian economy is completely dependent on banks to provide credit for growth. Therefore, if the emphasis is on growth, there is no case for tightening liquidity and making things difficult for the banks. In that case the growth agenda could not have been met.

Third, when it comes to the LCR norms—rate cuts were already there—and now, if we want those rate cuts to be transmitted, it was important that liquidity be eased. Banks should not be looking over their shoulders wondering what is going to happen in six or eight months.

So, while you are right that there may be signals to read, these changes are perfectly understandable and justifiable in terms of the mandate of a central bank—to ensure there is growth, to make policy counter-cyclical, and to ensure that rate cuts actually get transmitted.

Q: What kind of growth kicker do you expect from all this? As Mr. Khara said, relaxation in LCR norms, there is rollback of risk weights for NBFCs, relaxation on unsecured credit, and a big boost to co-lending so what kind of system-wide credit pickup do you foresee in FY26 or FY27, when these measures fully take effect?

Chadha: Mr. Khara is absolutely right. Credit policy, like politics, is the art of the possible. There are still challenges — for example, in corporate credit growth and the investment cycle. Now, those are things that you cannot switch and switch off again at the press of a button. But there are areas within the central bank’s purview. As he mentioned, unsecured loans have become a significant part of lending, both for NBFCs and banks, especially given limited alternatives for growth. This had to be addressed while keeping prudential norms in check. This is evident from the 2.5% increase in the runoff factor for digital deposits. The RBI seems fully cognisant of potential requirements but is giving banks time to adjust so that its policy actions are non-disruptive to growth.

Q: What else should we expect in terms of regulatory changes?

Khara: I think most of the adjustments have already been made. Liquidity remains a key area of concern. One possibility that has been discussed is a potential relaxation in the CRR in the coming months to ensure durable liquidity in the system. That could be something to look out for.

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