Even as the Reserve Bank of India (RBI) tries to keep liquidity in check, top public sector banks are sitting on excess government securities ? that they hold as statutory liquidity ratio (SLR) ? of 3-6%; that?s worth around R14,000-85,000 crore. The total SLR in the system is estimated at 30% with State Bank of India (SBI), for instance, having excess SLR of about R80,000 crore. The excess R4 lakh crore, held by the banks as SLR, could fund around a 12th of the current outstanding advances in the banking system.
SLR refers to the amount of liquidity that banks maintain as gilts; currently, this is mandated at 23% of their net demand and time liabilities. While Punjab National Bank (PNB) is maintaining SLR at 29%, SBI and Bank of Baroda?s SLR is at 28%. For Bank of India, it is at 26%. ?We have a comfortable liquidity situation and it isn?t as though demand for loans is very high. If there is a sudden demand, we always have the option to sell our bonds in the market,” said a Bank of Baroda executive.
?Having excess SLR does not amount to having liquidity because in such a market, it would not be easy to sell your excess SLR,? said BA Prabhakar, CMD of Andhra Bank, which has an SLR of 26%.
Weak demand for credit and the narrowing wedge between credit growth and deposit growth is another reason why some banks may choose to retain their excess SLR holdings until market yields fall to a level where banks can offload their holdings without incurring a loss. For the last four months, credit growth has remained below 15% due to lack of investment pick-up in the economy. For the fortnight ended July 12, non-food credit grew at a lacklustre pace of 14.4% y-o-y to R52,89,695 crore, the central bank said on its website. Meanwhile, deposit growth remained below 14% for the seventh consecutive fortnight. For the fortnight ended July 12, y-o-y deposit growth was at 13.7% to R70,79,861 crore, according to the latest RBI data.
?In a situation when yields are high there is no point offloading our SLR,? Ashwani Kumar, CMD, Dena Bank said.
Banks can use their excess SLR holdings to borrow from the Reserve Bank of India?s liquidity adjustment facility (LAF) at the repo rate of 7.25%. Untill recently, there was no cap on each individual bank?s borrowings from the LAF window. However, in a circular last week, the RBI capped banks? borrowings from its daily repo window at 0.5% of the deposit base of each individual bank.
At the same time, since the RBI has also asked banks to maintain 99% of the cash reserve ratio (CRR) requirement of 4% on a daily basis compared to the earlier requirement from 70%, banks may need to wind down some of their excess SLR holdings to manage their liquidity positions better.
?We have 3% more than the required SLR. Maintaining 99% CRR everyday will result in banks keeping a higher CRR of close to 4.2-4.5% because you cannot be really accurate in maintaining 4%. As of now, these measures will not impact our bond portfolio as we are not heavy borrowers in the market,? said VR Iyer, CMD, Bank of India.
Some bankers, however, feel that it may not be prudent to sell government bond holdings at the current juncture due to the high yields and, consequently, low prices in the government bond market. Bond yields have risen steeply since the RBI announced its first round of liquidity tightening measures to curb the fall in the rupee. After hitting a 14-month high last week, the 10-year benchmark yield ended at 8.16% on Friday.
