Money & Banking

Special Long-Term Repo Operations: SFBs slow to borrow via RBI window

K Ram Kumar Mumbai | Updated on July 30, 2021

Ample liquidity with Small Finance Banks, muted MSME credit demand the reason

Small Finance Banks (SFBs) seem to be in no hurry to borrow from the RBI’s special liquidity window , if one goes by the amount they have drawn since this facility was operationalised in May.

In the Special Long-Term Repo Operations (SLTRO) conducted by the Reserve Bank of India in May, June and July, SFBs cumulatively borrowed only ₹1,640 crore against the notified amount of ₹10,000 crore. They can still borrow the unutilised amount of ₹8,360 crore till October.

Industry experts attributethise to many SFBs having ample liquidity and the muted credit demand from the micro, small and medium enterprise (MSME) segment.

Some even cited constraints in terms of pledging SLR (statutory liquidity ratio) securities (investments made by banks in Government Securities/G-Secs and State Development Loans/SDLs) with the RBI to borrow three-year money via the special liquidity window. (SLR is the slice of deposits Banks have to invest in G-Secs and SDLs. Currently, it is at 18 per cent of deposits.)

In early May, the RBI had announced that it will conduct three-year SLTRO (one each every month from May through October) of ₹10,000 crore at the repo rate (4 per cent) for the SFBs. The unutilised amount is carried forward to the subsequent auction. This is to provide further support to small business units, micro and small industries, and other unorganised sector entities affected by the Covid second wave.

The SLTRO funds drawn by SFBs have to be deployed for fresh lending of up to ₹10 lakh per borrower. This facility is available till October 31, 2021.

“Though SLTRO is an excellent facility as it brings down our cost of funds and incentivises us to lend, liquidity-wise, most SFBs are currently comfortable. In our case, we have not found a direct use case for the facility at this point of time,” said a senior official of an SFB.

The official observed that if credit demand were to pick up, then instead of disposing off excess SLR securities that SFBs have, SLTRO may offer a better route to raise resources.

A senior executive with another SFB underscored that when a bank pledges SLR securities with the RBI, they become encumbered. Since the pledged/encumbered securities are deducted for the purpose of arriving at SLR, banks are mindful of maintaining SLR above the minimum threshold of 18 per cent of deposits.

Published on July 29, 2021

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