The reserve requirement for unlisted companies has been reduced to 10% of the outstanding debentures.

India's non-banking financial firms and listed companies that issue debentures will no longer have to maintain a certain level of redemption reserves against them, the government said on Monday, in an effort to increase the availability of money for lending.

The non-banking finance companies, also known as shadow lenders, have been battling a credit crunch since IL&FS, or Infrastructure Leasing & Financial Services, collapsed in late 2018 amid fraud allegations.

The fall of IL&FS, a major player in the market, pushed up borrowing costs for rivals and forced them to pull back on lending, hurting the availability of consumer loans. This has curbed consumer spending and hit sectors such as real estate and automobile that are big drivers of consumer demand.

The move will also make it cheaper for the shadow lenders and listed companies to raise funds and deepen the nation's bond market, the government said in a statement.

The companies will no longer need to maintain a 25 per cent reserve of the value of the outstanding debentures issued to the public or placed privately, the government said.

It has also reduced the reserve requirement for unlisted companies to 10 per cent of the outstanding debentures from 25 per cent.

The move will create more of a level-playing field between shadow lenders and commercial banks which are already exempt from maintaining such reserves, the government said.