The Reserve Bank of India (RBI) has increased the carve-out of liquidity coverage ratio (LCR) from the statutory liquidity ratio (SLR) by two percentage of the net demand and time liabilities (NDTL), thereby giving banks an advantage in the form of reduced bond buying to meet the regulatory norms. However, the step might be a negative for bond markets that are already reeling under a supply-demand mismatch due to reduced buying by banks.
At present, the assets allowed as Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing LCR of banks include government securities in excess of the minimum SLR requirement.
Within the mandatory SLR requirement, HQLA assets include government securities allowed by the RBI under the Marginal Standing Facility (MSF) —at 2% of the bank’s NDTL — and under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) —at 9% of the bank’s NDTL. The RBI has increased this 9% limit by another 2%.
As a result, the total carve-out from SLR now stands at 13% —indicating a higher percentage of securities placed under SLR can be used for LCR purposes. Ananth Narayan, professor of finance at SPJIMR, said that the additional 2% of SLR will reduce the effective statutory bond requirements of banks, and increase funds available for lending to their clients.
“Some banks — particularly in the private sector — were facing a liquidity crunch with high loan growth in relation to deposit growth. This in turn led to the recent spurt in bank CD and deposit rates, as well as CP and corporate bond yields. With this leeway, funding costs for banks should come down, and help banks, their clients and corporate bonds in general. However, this could put pressure on government bond prices, since statutory demand reduces at a time of low participation by banks,” he said.
PSU banks have reduced their bond buying over the last few months and this low participation has contributed in some way to the rise in yields, experts said. With less requirement for government securities, the demand-supply dynamics may contribute in putting pressure on the yields. On Wednesday, the benchmark yield closed eight points higher at 7.92%—the highest level attained since May 2015.