The Hindu Business Line : Chidambaram may ask PSBs to trim SLR investments

THE ripples created by hardening yields are set to enter the hall in Vigyan Bhawan where the Finance Minister, Mr P. Chidambaram, would be meeting the chiefs of public sector banks on Thursday.

The Finance Minister is expected to once again send a clear message to the bankers that they should reduce their penchant for parking funds in Government securities and instead, accord priority to their lending activity.

A note prepared by the Finance Ministry for the meeting has in fact said that PSU banks would be asked to find ways to trim their statutory liquidity ratio (SLR) investments, which far exceed the mandatory requirement of 25 per cent of the net demand and time liability.

"A higher proportion of funds used for investment (more than the statutory requirement) rather than by way of loans and advances impacts both the banks as well as the economic activity," the Finance Ministry has said.

In view of this, the meeting would discuss "the quantum of funds to be invested in Government securities and (how) investments may be brought down." On March 31, 2004, the aggregate SLR investment of PSU banks was 35.81 per cent, with several banks having investments of over 40 per cent.

The Ministry has also pointed out that though such investment may appear to be "safe", there are "unforeseen risks" attached, such as in the event of hardening yields. The rising yields had led to drop in the value of the investments of banks, thereby requiring them to make higher provisions for the depreciation. The rising yields had created a major flutter in the banking industry till the Reserve Bank of India recently stepped in and provided relief by altering the guidelines for classification of the investment portfolio.

The alternatives to SLR investments to be discussed at the meeting are increasing the retail portfolio, providing loans to building physical infrastructure and loans for irrigation projects and agricultural research. Banks would be asked to strengthen their treasury management and risk-mitigation skills.

Other items in the formal agenda include review of agricultural lending, infrastructure credit, lending by regional rural banks (RRBs) and credit to the small and medium enterprises (SME) sector.