Mumbai: The Reserve Bank of India (RBI) unveiled steps to encourage banks to lend more to small businesses and home buyers in a bid to spur credit growth in the struggling economy.

Banks will be exempt from setting aside the mandatory cash reserve ratio of 4 per cent of fresh loans for automobiles, residential housing and small businesses until July 31, the Reserve Bank of India said Thursday. It also extended a relaxation of rules on the classification of loans and introduced a 1 trillion rupee ($14 billion or Dh51.49 billion) facility for banks to borrow cheaply from the central bank.

Loan growth is set to slow to a 58-year low of around 6.5 per cent in the year through March as lenders battle the world’s steepest bad-debt ratio. A prolonged shadow banking crisis and the slowest economic expansion in more than a decade have also made banks wary of lending to companies.

The Bankex index of bank stocks rose as much as 1.5 per cent after the announcement, and the S&P BSE Finance index, which includes non-bank financial firms, climbed 1.6 per cent.

“The Reserve Bank is actively engaged in revitalising the flow of bank credit to productive sectors having multiplier effects to support impulses of growth,” the central bank said after keeping interest rates unchanged.

New liquidity facility

In a move to bring down banks’ funding costs and lend at a lower rate, the RBI’s new liquidity facility will allow them to borrow from the central bank for one and three years at 5.15 per cent.

“After a while, we are seeing a credit policy more than a monetary policy,” R. Sivakumar, a fund manager at Axis Asset Management Co, wrote in a Twitter post.

The RBI extended asset classification relaxations by one more year for small businesses that have defaulted, and for commercial real estate borrowers where the project has been delayed “beyond the control” of the owner of the company. Banks are allowed to mark these loans as performing instead of downgrading them, which would have required them to set aside more capital.