RBI Warns Banks Against Loan Price War

September 23, 2026 admin 0 Comments asset quality, bank lending, Banking liquidity, credit growth, credit risk, FCNR deposits, loan pricing, rbi, retail credit

The Reserve Bank of India (RBI) has cautioned banks against aggressive loan-price competition as the banking system deals with a large liquidity surplus following substantial inflows through Foreign Currency Non-Resident (FCNR) deposits. The concern, conveyed by RBI Deputy Governor Rohit Jain at a meeting with senior bankers, is that excess liquidity could encourage lenders to push credit into riskier segments simply to generate sufficient returns on their deposit funding. Such aggressive lending could eventually result in higher levels of stressed or “sticky” assets.

Banks have received around ₹11 lakh crore in fresh FCNR inflows, after accounting for renewals. The RBI has absorbed approximately ₹2.5 lakh crore through foreign-exchange intervention routes, including swaps and spot-dollar sales, and another ₹3.5 lakh crore through bond sales and borrowing from banks through the long-term reverse-repo window. However, some liquidity-absorption measures are temporary, meaning funds could return to the money market as government spending increases.

The pressure to deploy surplus funds comes as retail credit continues to expand, but at a slower pace than overall credit. Retail credit growth was around 16% year-on-year, compared with just under 19% total credit growth, according to the report. A bank CEO cited in the report said lenders need roughly a 2.5% markup on loans and a 3% net interest margin to make lending economically viable. RBI’s warning therefore highlights the need for banks to balance liquidity deployment and growth ambitions with credit underwriting, asset quality and risk-adjusted returns, particularly as lending to NBFCs is also growing significantly.