According to RBI Governor Sanjay Malhotra, the significant gap between bank credit and deposit growth does not constrain lending capabilities. As reported by The Hindu BusinessLine, credit growth of all scheduled banks reached 17.44% as of May-end 2026, while deposit growth stood at 12.14%, creating a 530 basis points gap. Malhotra emphasized that this disparity does not represent a constraint for banks to lend, as they maintain sufficient capital reserves. The central bank has also issued revised guidelines for the Lead Bank Scheme (LBS), aimed at strengthening district-level credit planning, improving coordination among stakeholders and deepening financial inclusion across the country.
The RBI has introduced significant new facilities to enhance foreign currency inflows and lending capabilities. Indian banks can now lend against FCNR(B) deposits, with the central bank offering forex swaps only on the principal amount to attract dollars by absorbing currency hedging costs for banks. This move aims to boost FCNR(B) rates to 6-7.1% and allows banks to swap eligible FCNR(B) deposits, ECBs, and overseas borrowings with the RBI at favorable rates. The RBI has also allowed unlimited leverage against deposits and permitted Indian banks to lend to non-resident Indian (NRI) clients through their overseas branches, making the FCNR(B) deposit route more attractive for both depositors and lenders. The central bank has also clarified rules for stand-by letters of credit and introduced a swap facility for external commercial borrowings, easing dollar hedging for businesses.
The Governor explained the fundamental relationship between credit and deposits in the banking system. As reported by The Hindu BusinessLine, Malhotra stated that 'credit creates deposits' rather than deposits driving credit decisions. He noted that when banks provide ₹100 credit, it immediately increases deposits as the borrower's account is credited. The Governor clarified that while depositors may transfer funds between banks, the overall flow remains within the banking system, supporting continued lending capacity. This capital-driven approach allows banks to maintain sufficient liquidity for lending operations even when deposit growth lags behind credit expansion.
The RBI has implemented comprehensive regulatory reforms to ensure uniform treatment across all credit facilities. The central bank has mandated uniform prudential treatment for all credit facilities, including those disbursed via UPI, closing a regulatory loophole that previously allowed banks to offer lighter treatment to UPI-linked credit. Now, the nature of the credit, not the technology, dictates capital adequacy and provisioning, ensuring consistent regulation across all credit products. This regulatory clarity provides banks with clearer guidelines for managing their lending portfolios and maintaining adequate capital buffers, while the RBI continues to review prevailing and evolving liquidity conditions in the banking system.
