Will SLR cut lead to lower lending rates?

Even though the Reserve Bank of India did not tinker with policy rates, it did just enough to ensure that access to credit for productive sectors of economy is not hindered.

The central bank slashed the amount of funds banks have to compulsorily park in specified assets (also known as Statutory Liquidity Ratio), such as government securities, from 23 per cent to 22.5 per cent of total deposits.

This move, according to analysts, could infuse about ₹30,000-40,000 crore into the banking system. But whether this will have any impact by way of lower lending rates or more credit to the so-called “productive sectors of the economy” remains to be seen. Anis Chakaravarty, Senior Director and Lead Economist at Deloitte India, said: “This is a calculated move by the RBI and should give a boost to growth.”

However, bankers seem to disagree that such a move will have any significant impact on lending as most banks have already deployed funds in excess of the statutory requirements in government securities. According to SS Mundra, CMD, Bank of Baroda, “Though there will be more liquidity for productive purposes because of the 50 basis point cut, the system is already sitting on excess SLR. No rate action can be anticipated immediately as there are other events such as the Budget and the monsoon before the next policy.”

Export refinance In another move, the RBI reduced the liquidity provided under the export refinance credit facility from 50 per cent of eligible export credit outstanding to 32 per cent with immediate effect. To compensate for this reduction, the RBI has decided to introduce a special term repo facility of 0.25 per cent of banks’ total deposits.

According to Mundra, this means that the rates will be become more aligned to the market rates. “It will also help in developing a better yield curve,” Mundra added. “This should improve access to liquidity from the Reserve Bank for the system as a whole without the procedural formalities relating to documentary evidence, authorisation and verification associated with export credit refinance,” the RBI said.

This is in accordance with the RBI Deputy Governor Urjit Patel’s recommendation “to move away from sector-specific refinance towards a more generalised provision of system liquidity without preferential access to any particular sector or entity.”

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