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Informist, Friday, Jun. 6, 2025

MUMBAI – Credit transmission in the lending market is yet to fully take effect, despite comfortable liquidity in the banking system, Reserve Bank of India Governor Sanjay Malhotra said on Friday. Speaking at the central bank's second bi-monthly monetary policy for 2025-26 (Apr-Mar), Malhotra acknowledged that transmission typically happens with a lag. "The comfortable liquidity surplus in the banking system has further reinforced transmission of policy repo rate cuts to short-term rates," he said.

Later in the press conference, Malhotra reiterated that the transmission of monetary policy to the credit market is still unfolding and will take more time to reflect fully. He said policy transmission is happening but remains uneven. "We are seeing monetary policy transmission, especially at the shorter end of the curve," Malhotra said. 

Citing past cycles, Malhotra noted that monetary policy transmission typically plays out over six to nine months. "This is what we have seen in the last two cycles—both during tightening and easing. It happens, but with a lag," he said.

While the impact is visible in money market rates and on the deposit side, broader credit market transmission is still evolving, Malhotra said. "Credit transmission cannot happen overnight. It takes time". So far, banks have passed on around 27 basis points on the deposit side, and about 25 basis points on lending, Malhotra said. 

He also noted that front-loaded rate cuts help support quicker transmission. "We need even faster policy transmission. That's why we have provided ample liquidity—to improve earnings, reduce borrowing costs, and aid in transmission," Malhotra said. The RBI estimates that the liquidity measures could improve bank earnings by at least 7 basis points.

However, Malhotra cautioned that assessing how monetary policy actions translate into real economic outcomes remains difficult. "It's very difficult to assess how this transmission moves from monetary policy to credit rates and then into the real economy," he said. He emphasised that credit growth depends on demand and macroeconomic conditions, which the central bank cannot directly control. "We cannot regulate credit or force rates down. It has to be market-driven," he said. "The market will respond to credit demand. There are many players now—(banks, non-banking financial companies, alternative investment funds, private credit providers) so the system must be left to market forces."

Malhotra also noted that short-term rates in the money market have reflected policy easing, but the pass-through to broader credit segments remains slow, he said. He said that earlier stress in unsecured retail loans and credit card receivables has started to ease. However, pressure in the microfinance segment still persists. Though banks and non-banking financial companies operating in these high-risk segments are adjusting their business strategies.

Lenders have tightened credit underwriting, strengthened collection processes, and are realigning their lending models to contain future risks. "Banks and NBFCs active in these segments are already recalibrating their business models, strengthening their credit underwriting practices and stepping up their collection efforts to avoid any excessive build-up of risks on this front in future," Malhotra said. 

NBFCs also show resilience, with strong capital buffers and improved gross non-performing asset ratios. However, despite sector-specific concerns, overall credit risk in the system appears well-contained, supported by proactive steps from lenders and stable macroeconomic conditions, the governor said. 

At the system level, scheduled commercial banks continue to show robust financial strength, Malhotra said. "The asset quality parameters, liquidity buffers and profitability parameters have shown further improvement," he said.  End

Reported by Sachi Pandey

Edited by Deepshikha Bhardwaj

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