The Reserve Bank decision to reduce the statutory liquidity ratio (SLR) is credit positive for banks as it would help them manage liquidity and increase profitability, Moody’s Investors Service said today.
Last week, RBI reduced SLR, the minimum amount of Government securities (G-secs) that banks have to hold as a per cent of their deposits, by 50 basis points (bps) to 21.50 per cent.
“It is credit positive for banks because it will provide them with greater flexibility to manage liquidity and improve profitability,” the international rating agency said in a report here.
Since 2010, the RBI has cut SLR by 350 bps.
The report said domestic banks historically have had high SLR requirements because it allowed the government to fund its borrowing requirements through allocation of a large part of deposits by banks to buy these instruments.
The report said although banks typically hold G-secs as part of their liquidity management, the required amount that they must hold under SLR guidelines often exceeds the requirement if they are managing liquidity without these norms.
Moreover, SLR holdings, despite consisting of liquid instruments, have not helped support banks’ liquidity management as they had to maintain these levels of holdings under most circumstances, it said.
“Also, holding such a large amount of relatively low- yielding government bonds lowers profitability,” Moody’s said, adding the recent cut also makes it easier for banks to comply with the RBI’s liquidity coverage ratio (LCR) norms.
Last June, the RBI introduced LCR norms, which would be implemented in a phased manner with a requirement of 60 per cent from this January. The requirement would rise in equal steps to reach 100 per cent by January 2019.
Moody’s said banks face difficulties in complying with LCR norms because for the purposes of calculating high-quality liquid assets, only those holdings of G-secs that exceed the minimum SLR requirement are eligible.
“With this reduction in the SLR, amount of eligible securities for LCR computations will increase.”
Banks’ holdings of G-secs typically exceed minimum SLR norms by a few percentage points. “We expect all rated banks to benefit from this development,” it added.