RBI may allow banks to dip up to 12% of their government bond holdings (statutory liquidity ratio or SLR) to meet their liquidity coverage ratio (LCR).
The Reserve Bank of India (RBI) governor Raghuram Rajan, deputy governor HR Khan and Urjit Patel met bankers on Tuesday to sort out the liquidity issues prevailing in the money markets.
RBI may allow banks to dip up to 12% of their government bond holdings (statutory liquidity ratio or SLR) to meet their liquidity coverage ratio (LCR).
Banks are mandated to invest 21.5% of their deposits in the sovereign bonds as buffer in case of a crisis.
Though banks were also pressing for a cut in the cash reserve ratio (CRR), the central bank is not open to the suggestion, said a banker who was privy to the proceedings. CRR is the portion of deposits that banks have to keep as a reserve requirement with the central bank.
From January 1, 2016, RBI had made it mandatory for banks to keep a liquidity coverage ratio (LCR) of 70% from the earlier 60% as part of the requirements under Basel III. LCR is the portion of the net cash outflows during the next month for a bank. Its loan sanctions, its commitments for various payments, etc., form a part of the LCR. Now banks have to keep 70% of these net outflows as high quality capital, putting pressure on the surplus.
Bankers from State Bank of India, ICICI Bank, Axis Bank, HSBC and Standard Chartered Bank participated in the meeting.
Government spending is also on a standstill to meet the fiscal deficit target. This is also accentuating the cash in the banking system, making it difficult for the banks to lend to borrowers and grow their balance-sheet in the crucial fourth quarter.
The government cash balance with the RBI is Rs 1.4 lakh crore. The high provisions that banks will continue to undertake in the fourth quarter for their weak assets as part of the cleaning up exercise initiated by the RBI will further worsen the situation.
Banking system is borrowing on an average of Rs 1.3 lakh to Rs 1.4 lakh crore from the RBI by pledging government bonds, and it is expected to expand as the demand for credit surges. RBI said in its February 2 policy document, "Liquidity conditions tightened in the second half of December with advance tax outflows. Tightness spilled over into January 2016 on the back of a seasonal pick-up in demand for currency, restrained spending by the government and a pick-up in bank credit growth, in relation to deposit mobilisation."
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