The Reserve Bank of India. Photo: AFP
The Reserve Bank of India. Photo: AFP

With Indian lenders and money markets facing a liquidity crunch, the central bank has said it is ready to provide necessary support.

The Reserve Bank of India on Thursday said it would allow banks to dip further into statutory cash reserves. Banks will now be able to “carve out” up to 15% of holdings under the statutory liquidity reserves to meet their liquidity coverage ratio (LCR) requirements, up from 13% previously. The new rules will be effective from October 1, Press Trust of India reports.

The move by the central bank follows concerns over tight liquidity conditions and banks’ unwillingness to lend to non-banking financial companies (NBFCs).

Concerns of a liquidity crunch were triggered by defaults by a firm in the Infrastructure Leasing & Financial Services Ltd (IL&FS) group. It spread to NBFCs, which in turn roiled financial markets.

IL&FS Financial Services, a company in the IL&FS group, defaulted on one of its commercial paper issuances due for repayment on Monday. This was the third default by the company.