Page 10 - Banking Finance August 2025

RBI CORNER

Finance for Regulatory ing submissions, the RBI established the due to global uncertainties, including
violation and imposed the monetary ongoing trade disruptions and geopo-
Lapses penalty accordingly. litical tensions such as the Israel-Iran
The Reserve Bank of India (RBI) has lev- conflict.
ied monetary penalties on HDFC Bank Bank Deposits Surge, Out- Analysts suggest that the safe haven
and Shriram Finance for breaching
regulatory norms. HDFC Bank was fined pacing Credit Growth: RBI appeal of bank deposits is gaining trac-
Rs. 4.88 lakh for violating foreign invest- Data tion once again, especially amid falling
interest rates and volatile alternative
ment regulations while sanctioning a According to data released by the Re- markets, reinforcing the banking
term loan to a client. The RBI noted serve Bank of India (RBI), banks wit- system's role as a stable financial inter-
that it had issued a show-cause notice
nessed a significant surge in deposits, mediary.
to the bank, followed by a written re- with growth far exceeding credit ex-
sponse and oral submissions. Upon pansion in the fortnight ending June 27,
evaluating the submissions, the RBI con- 2025. Deposits of all scheduled com- RBI Proposes Draft Guide-
cluded that the contraventions were mercial banks rose by Rs. 3.54 trillion, lines for Novation of OTC
substantiated and merited a penalty.
while credit offtake increased by only Derivative Contracts
Separately, Shriram Finance Limited Rs. 1.69 trillion during the same period. The Reserve Bank of India (RBI) has is-
faced a penalty of Rs. 2.70 lakh for non- This marks a continuation of the trend sued draft guidelines for the novation
compliance with provisions under the observed since May, where deposit of over-the-counter (OTC) derivative
Reserve Bank of India (Digital Lending) growth has consistently outpaced loan contracts, aiming to rationalize the
Directions, 2025. The penalty followed disbursals. As of May 30, deposits grew regulatory framework. Novation in-
a statutory inspection of the company's at 10.1% year-on-year, compared to volves substituting one market maker
financials as of March 31, 2024. Based
credit growth of 9.8%. Banking experts with another in an existing OTC deriva-
on supervisory findings, the company attribute the rise in deposits to inves- tive contract, forming a new agree-
was issued a notice and was asked to tor caution, noting that traditional in- ment between the remaining party
explain the reasons for non-compliance. vestment avenues like equities and and the new counterparty. According
After considering all responses and hear-
gold have become relatively expensive to the "Draft RBI (Novation of OTC
Derivative Contracts) Directions,
2025," such transactions must be ex-
RBI Announces Record Rs. 2.5 Lakh Crore VRRR Auc- ecuted at prevailing market rates and

tion Amid Liquidity Surge only with prior consent from the con-
tinuing party.
The Reserve Bank of India (RBI) will conduct a record Rs. 2.5 lakh crore
Variable Rate Reverse Repo (VRRR) auction to manage a growing liquidity The guidelines propose that associa-
surplus in the banking system, estimated to exceed Rs. 9 lakh crore. De- tions like FIMMDA and FEDAI, in con-
spite draining Rs. 3 lakh crore through earlier VRRR operations, the surplus sultation with market participants, de-
remains elevated, prompting the central bank to intensify its absorption ef- velop standard agreements for nova-
forts. The surplus stems from strong government spending, large fiscal out- tion based on global best practices. Al-
flows, and RBI's forex interventions, which have injected additional rupee ternatively, a standard master agree-
ment may be used. The draft seeks to
liquidity.
replace the RBI's existing 2013 circu-
Simultaneously, deposit growth has consistently outpaced credit offtake, lar, taking into account evolving regu-
leaving banks with idle funds. Regulatory adjustments to the liquidity cov- latory frameworks and market feed-
erage ratio have further expanded banks' lendable resources. The VRRR, back. This marks a step toward en-
which allows banks to competitively bid, is preferred over fixed-rate tools hancing transparency and efficiency in
as it better aligns overnight market rates with the RBI's policy stance and India's derivative markets while ensur-
ensures rates remain within the liquidity adjustment facility (LAF) corridor. ing regulatory consistency in contract
The central bank's proactive stance mirrors similar liquidity management transfer processes. Public comments
actions seen globally post the 2008 financial crisis. are expected before finalization.

BANKING FINANCE | AUGUST | 2025 | 9