SLR by Subbarao

Dr Subbarao has now made it a habit to say openly what he feels strongly about, which is good. Sometime ago, he spoke of the independence of RBI, which was well taken. Now, he has touched on the issue of SLR, which should make us think hard. Today, at 24%, SLR may be interpreted as being a drag on the banks, which are per force compelled to hold government securities instead of using them for lending. Is this really bad for them? One is not sure of the answer, considering that today, for the system as a whole, the investments’ deposits ratio is 30.7%. There are really two things here. The first is that, ideologically speaking, banks should have greater flexibility with their funds and hence should have the option of using the investment or credit windows. Fixing a high number puts pressure on the use of funds by banks. Considering that they have the CRR requirement (6%) as well as priority sector lending compulsion of 40%, it makes sense to have a lower SLR number. They can still invest more in government paper in case they find them attractive from the point of view of the capital gains to be made or for satisfying the prudential regulatory norms. The RBI Governor’s thoughts, if implemented, will actually help banks a lot. The second is how low should SLR drop? One way to tackle this issue is to gauge the level and extent of repo borrowings, which is, in a way, indicative of surplus SLR securities, which are being given to RBI for cash and is thus a measure of the liquidity deficit. Hence, a sustained borrowing of, say, R50,000 crore from the repo window means that SLR can be reduced by this proportion. Is there a downside to this reduction? The party that benefits a lot from this high stipulation is the government that gets the banks to park their funds in its debt. A lower level will theoretically impact its ability to get subscribers for its debt. But then, given that banks are one component of this basket that holds around 40% of all government paper (insurance companies, PDs and provident funds are other important holders), this should not be an issue. Also the fact that banks are holding excess SLR means that, overall, the impact will be muted, as those with surplus SLR securities will continue to subscribe to them. But the positive thing is that all banks which are today facing a shortfall can have access to greater use of their own funds rather than look for borrowings in the call market. One can sense that RBI is becoming more progressive in its monetary view as well as in its policy formulation. While the approach has been so far bordering on being cautious, it has taken a pragmatic view on the operational issues for banks such as the base rate concept, opening up of savings rate (in progress), introducing the marginal standing facility and now lowering of SLR, and probably also CRR, when the time is right. This is really good news.

FE