SLR cut not to make loans cheaper today, but to give banks balance-sheet flexibility: Rahhuram Rajan

Updated: Aug 6 2014, 07:18am hrs
The RBI on Tuesday cut the SLR by

50 bps to 22%. In a media interaction, governor Raghuram Rajan said this would not necessarily make loans cheaper, but was intended to give banks some flexibility when credit picked up. Excerpts:

How will the SLR cut help banks

If the governments finances are improving and it is on the fiscal consolidation path, we can afford to liberate more access to financing and make it possible for both the private sector and the public sector firms to get access to that. They may not need it right now, but we are hopeful that, as the economy picks up and the credit growth gets stronger, banks would be able to use that space to lend to the productive sectors of the economy.

The best time to effect these cuts is when credit demand is not so strong that the reductions suddenly convert into a substantial increase in demand and a substantial shift away from government bonds. The SLR cut was not intended to make loans cheaper today, rather it was done to give banks more flexibility in their balance sheets going forward as credit growth picks up.

Could you add some colour to your liquidity management framework

We have looked at the call money rate oscillations and are trying to keep the rate closer to 8%. Some of those oscillations are because of substantial and unanticipated variations in government balances and we have tried to work with that, but it creates a certain amount of volatility. As you know, there are increases in balances before tax dates and some of them you can anticipate by the size. What we are looking at is the possibility of doing more frequent term repos and of shortening the maturity of term repos and also, perhaps, thinking of the timing of the auctions during the day so as to manage volatility. To do these in a reasonable fashion, we are doing an analysis that is necessary. Hopefully, within a very short period, we will come out with the necessary changes so as to see if we can smoothen the changes.

What is the interest rate trajectory that the RBI is looking at

I don't think our stance has moved from where we were last time and I think we see the short-term risks more balanced than last time. However, there is the issue of the monsoons where we have to wait and see how it plays out. Let me emphasise that a below-par monsoon doesn't necessarily mean significantly below-par productivity as it depends on where the monsoon is below par. And, similarly, below-par production doesn't mean higher food prices as it depends on food management too.

The government has stated quite frequently that it is keeping an eye on food production and has taken steps, and we have to wait and see how that plays out. The RBI, in no way, will hold rates high any longer than necessary. There is a path we are trying to achieve and we are not against growth, but we do think that growth will be most benefited if we disinflate the economy and we don't have to fight this fight again. Lets fight the anti-inflation fight once and let's win and that will create the best conditions for sustainable growth.

Are you treating SLR while keeping LCR in mind

Yes, as we move to liquidity coverage ratio (LCR), and those become issues for the banks, we want to give them flexibility. To some extent, we have to reduce the kind of obligations that are put on the banks because they are entering a more competitive environment. So, given that, steadily we want to reduce those, consistent with the space that the government provides by rectifying its finances. It's targeted towards both meeting international norms on liquidity and also removing some domestic constraints for the banks and financial institutions in these markets. So, as we bring down SLR, over time, they will have to make a decision on meeting the LCR requirements.

What is your stance on the growing NPAs in the banking system

We are working very hard to tackle NPAs and, over the next days, we will be able to announce some measures relating to asset reconstruction companies (ARCs). The idea is broadly to ensure that financial assets are dealt with in a way to ensure the maximum value for the underlying assets and to put the economy back on track in terms of growth. If there are distressed assets, can we bring in new equity and if there is a restructuring that is needed, will they do it quickly Time, often, is the most important thing. The longer you wait, more distressed the assets become.