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India would do well to further relax the statutory liquidity ratio (SLR) requirements for banks, the Economic Survey for 2014-15 has suggested.
Any such move would provide liquidity to the banks, depth to the government bond market and encourage the development of corporate bond market, said the Survey tabled by Finance Minister Arun Jaitley in Lok Sabha on Friday.
The right sequence would be to gradually reduce SLR and then provide incentives for a deeper bond market, the Survey has suggested.
SLR — the minimum amount of notified securities that banks must hold as a percent of their bank deposits — is more of a conduit for financing government deficits, although it is also an instrument of credit control.
The RBI has recently taken gradual steps in reducing the SLR from 25 per cent to 21.5 per cent.
Since 2010, the RBI has effected SLR reduction of 350 basis points in aggregate.
“At this point when interest rates in the economy are expected to move down, the survey’s suggestion to gradually reduce SLR is a good one and will be beneficial to banks and economy”, V Kannan, former Chairman & Managing Director of Vijaya Bank told Business Line.
The Survey has highlighted that further SLR reduction could help reduce the need for Government resources for bank recapitalisation.
This is a better and cleaner way of recapitalizing the banks than to allow banks to mark their G-secs to market and realize the accounting profits, according to the Survey.
Reducing SLRs are critical to finding better sources of infrastructure financing, the Survey said, adding that time is ripe for developing other forms of infrastructure financing, especially through bonds market.
SLRs have stymied the development of government bond markets, which in turn stifles the development of corporate bond market.
Asked if the time was ripe for more reduction in SLR, Shinjini Kumar, Leader-Banking and Capital Markets, PricewaterhouseCoopers, said it would depend on how the fine balance of growth and inflation pans out.
Reducing SLR is the direction for the future in any case as the anticipated growth in the economy kick starts, she said.
A functional and deep bond market has been on the agenda for a long time and while merely reducing SLR is not the only pre-requisite to achieve it, it will help, Shinjini said.
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