The Hindu Business Line : Banks seek SLR securities status for subsidy bonds

Bangalore, Nov. 25 Following a deluge of deposits from investors, public sector banks have approached the Reserve Bank of India for widening the category of bonds under the Statutory Liquidity Ratio (SLR).

Among the securities that banks want as part of the SLR are subsidy bonds issued to refineries, fertiliser companies, Food Corporation of India and bonds issued to State Bank of India against the rights issue. Bankers said that since all these categories of bonds were also sovereign issues, there was little reason for distinguishing between sovereign-issued securities.

Top bankers said that many of them had sought this relaxation earlier also, though the RBI had been non-committal. They said such a move would result in increasing credit availability to the productive sectors of the economy. This is particularly so in a situation when cross-border credit flows are virtually choked off.

Deposit inflows

Bankers said that deposit inflows were coming into the banking system at the rate of about Rs 3,500 crore per day. The inflows, in turn, generated demand for government securities for meeting the SLR requirements.

Although SLR was down to 24 per cent, bankers said that demand for the securities still continued. The chase for the securities was also partly because PSU banks currently have only a small portfolio of marked-to-market category of securities. The bulk of the securities are still held as part of their held-to-maturity (HTM) category. Under the HTM category, banks are permitted to hold up to 25 per cent of their net demand and time liabilities.

The ICICI Bank’s Chief Economist, Dr Samiran Mukerjee, said, “Inclusion of the subsidy bonds would result in releasing at least about Rs 1.5 lakh crore of liquidity.” This was because the outstanding subsidy bonds are at present about Rs 1.5 lakh crore. This included the recent issue of Rs 22,000 crore of oil bonds.

Besides, banks said that conversion into SLR securities would also improve the liquidity of the subsidy bonds. At present, subsidy bonds are eligible only for ready forward transactions among the banks themselves or in the CBLO (Collateralised Borrowing and Lending Obligations) market.

High spreads

The illiquidity of the subsidy bonds was evident from the high spreads between subsidy bonds and sovereign bonds. For instance, the 7.75 per cent 2021 per cent oil bond is currently quoted at 9.4 per cent.

The sovereign issue 7.94 per cent 2021 per cent is currently quoted at 7.42 per cent or a spread of over 200 basis points.

The high spreads implied that the oil companies were discounting the bonds at these levels for raising working capital resources, keeping their funding costs high. The high spreads were despite the reduction in the repo rate from 9 per cent in the beginning of October this year to 7.5 per cent at present.

Yet one crucial factor preventing the inclusion of the subsidy bonds under SLR was the effect on the cost of government borrowings. Bankers said that the fear was conversion of subsidy bonds to SLR status would impact the cost of government borrowings.

However, they added, with the deposit inflows continuing at the current pace given the state of the equity markets, there was little reason to believe that government security yields would harden.

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