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Monday, November 25, 2013

RBI favours slashing SLR to free up funds for industry
Photo: The HIndu Business Line
Mumbai, November 22, 2013: RBI has again stressed on the need to reduce the level of mandatory holding of government securities by banks, as that would enable credit flow to other sectors. It has, however, warned that it might have to wait until government finances improve and when pension funds gather size.

"One of the mandates for the RBI in the RBI Act is ensuring the flow of credit to productive sectors of the economy," it said in a report on Trend and Progress of Banking. "In this context, it is necessary to reduce banks' requirements of investing in government securities in a calibrated way, to what is strictly needed from a prudential perspective."

RBI governor Rajan had raised this issue at his first media briefing after taking charge on September 4. At present, banks are mandated to park 23% of the deposits mobilised by them in government bonds under what is called the statutory liquidity requirements, or SLR.

However, most banks park much higher proportion in government bonds. As of November 1, the banking sector as a whole had parked almost 30% of the deposits in government bonds. This is almost 7 percentage points in excess of the mandated requirement. Due to this practice, lending to the commercial sector, which is the primary mandate of banks, tends to get restricted.

Banks tend to opt for higher investments in government bonds as these investments are risk-free as they offer sovereign protection besides stable returns. Ex-RBI deputy governor Rakesh Mohan has called this practice "lazy banking." RBI, however, is aware of the limitation of this proposal, given the high market borrowing needs of the government.

"It is recognised that the scope for such reduction will increase as government finances improve," the report said. "Further, as the penetration of other FIs, such as pension funds and insurance companies increases, it will be possible to reduce the need for commercial banks to invest in government securities."

The Reserve Bank also said the banking industry needs to grow to an estimated Rs 288 lakh crore by 2020 from about Rs 115 lakh crore in 2012 to support the economic growth as envisaged in the 12th Plan. "The banking sector needs to match up the likely acceleration in the credit-to-GDP ratio as the economy expands," the RBI said in the report.

The RBI said there is a need to change the present structure to enable the banking system to grow in size, resources, efficiency and inclusively. "The Reserve Bank has initiated a debate on reorienting the banking structure in the country to better serve the needs of the real economy. As the economy expands, more resources will be needed for supporting the growth process."

Further, as the penetration of other financial institutions, such as pension funds and insurers, increases, it will be possible to cut the need for commercial banks to invest in gilts.