The Hindu Business Line : Case for cut in banks’ SLR, abolition of branch licensing

New Delhi, April 2 A Planning Commission-appointed High Level Group on services sector has made a case for the abolition of bank branch licensing, phasing out of directed priority lending by banks and gradual reduction in the statutory liquidity ratio (SLR) requirement for banks.

Currently, banks have to keep 25 per cent of their net demand and time liabilities in government securities as SLR requirement. Last year, the Government empowered the RBI to specify the SLR to be maintained by banks.

The report of the High-Level Group has favoured alignment of banks’ cash reserve ratio (CRR) over time with global benchmarks. The Group was established to comprehensively examine the different aspects influencing the performance of the services sector and suggest short-term and long term policy measures to improve and sustain its competitiveness in the coming years.

Government ownership

On government ownership in banks, the Group has said that it would be “appropriate to consider evolution of a path towards reduction of government ownership in a manner that minimizes dislocation or dissonance among various stakeholders”.

The High Level Group headed by Planning Commission Member, Mr Anwarul Hoda, submitted its report to the Prime Minister, Dr Manmohan Singh here on Wednesday.

On consolidation, the report said that there was need to catalyse consolidation among banks, stating this was particularly relevant for mid-sized public sector banks that are currently duplicating investment in technology and other infrastructure and not benefiting from economies of scale.

The report also suggested that the Government may consider permitting foreign investors to own a larger share in insurance companies.

Moreover, the high capital requirement for insurance, which restricts growth and increases the cost of insurance needs to be brought down and set at 100 per cent of the solvency margin, the report has said. Currently, the foreign direct investment (FDI) cap in insurance sector has been pegged at 26 per cent.

FDI, pension reforms

The report has recommended the removal of FDI restrictions on re-insurance companies. On asset management, the High Level Group has recommended that the regulations governing venture capital and private equity funds should be rationalized so as to eliminate the constraints on the ability of the institutional investors like banks, insurance companies and pension funds to invest in this segment.

On pension reforms, the report has suggested that all categories of pension and provident funds should be permitted to diversify their investment portfolios, shifting from the current excessive share of government securities to various categories of corporate debt, securitized paper and an appropriate proportion of equity investments. Provident funds are now allowed to invest in the stock market only 5 per cent of their incremental accretion.

Financial markets

For financial markets, the High Level Group has said that the debt capital market and securitisation market should be developed through affordable and uniform levels of stamp duty , listing of securitisation paper and pass through tax treatment to securitisation Special purpose vehicles (SPVs) similar to mutual funds.