There is need to bring down the Cash Reserve Ratio and Statutory Liquidity Ratio in a calibrated manner so that banks will have more money to lend as credit, said Dr D. Subbarao, Governor, Reserve Bank of India.
CRR is the portion of deposits that banks have to keep as cash with the RBI and is currently at six per cent. SLR is the percentage of deposits that banks have to invest in Government securities and is currently at 24 per cent.
Speaking on the sidelines of a seminar in Mumbai on Tuesday, Dr Subbarao said that while CRR and SLR cannot be done away with, the thinking within the RBI is that both the reserve ratios are high and they must be reduced in a calibrated manner.
He, however, did not say by when or by how much these ratios should be reduced.
“It is SLR which has protected us (Indian banks) from the global financial crisis,'' Dr Subbarao said.
Under Basel III guidelines, there are other provisioning requirements which mimic the SLR role, he added.
G-Sec yields rise
Following the Governor's comments, Government securities' yields rose on Tuesday. The 7.8 per cent benchmark 2021 paper closed at Rs 96.71 (8.30 per cent YTM), against the previous close of Rs 96.82 (8.28 per cent YTM).
The perception is that if SLR is reduced the demand for Government securities will come down, said the head of treasury of a public sector bank.
However, the rise in yields was also on account of fears that the RBI may raise the key rates by another 25 basis points in the mid-quarter review of the monetary policy next week, he added.
“It is unlikely that the RBI would take steps to bring down SLR or CRR in the current situation, but the Governor's comments could be an indication of how things shape up in future. CRR and SLR holdings do not earn any interest for banks.
“Bringing them down will improve the cost for banks, although demand for Government securities may come down to some extent,'' the treasury head said.