Lowering SLR will not nudge banks to raise lending

The RBI lowering the total SLR requirement (statutory liquidity) — government securities held by banks — by 50 basis points to 20 per cent, offers leeway to banks to free up funds and deploy in lending.

But banks are unlikely to do so immediately. By keeping the ceiling on the amount of SLR securities that can be held under the ‘Held to Maturity’ (HTM) category unchanged at 20.5 per cent, the RBI has also not made it less viable for banks to stock up excess government securities than mandated.

On the housing loan front, however, lowering risk-weights in certain buckets and reducing the standard provisioning requirement from 0.4 per cent to 0.25 per cent, should prompt banks to push forth lending in this segment.

Banks are currently required to hold 20.5 per cent of deposits as SLR. The RBI’s 50 bps cut can free up close to ₹57,000 crore of funds. But banks may not loosen up their kitty immediately.

This is because banks prefer to carry excess investments and park funds in highly safe assets, particularly when lending opportunities are weak. Banks, on an average, continue to invest 3-5 per cent more than the mandated requirement.

What could have forced the hands of banks to some extent, is the reduction in the ceiling of Hthe TM. This, the RBI has kept unchanged at 20.5 per cent.

Banks are allowed to keep a portion of their SLR securities under the HTM, which do not have to be adjusted to reflect their market value at the end of every quarter.

In the past, banks were allowed to hold more securities in the HTM category than the mandated level of SLR. But since January 2016, banks have to align their HTM portfolio with the total SLR requirement.

Banks that carried excess SLR could park the surplus in the AFS (available-for-sale) book but had to mark-to-market such investments at quarterly or at more frequent intervals. The RBI not reducing the ceiling on HTM along with the total SLR requirement, will now prompt banks to still hold higher than mandated government securities without having to bear the risk of volatility in their treasury income.

The RBI’s tweak on SLR will, for now, only give banks more flexibility to meet their liquidity coverage ratio (LCR) requirement.

From January 2015, banks are required to meet the guidelines on the minimum LCR as per Basel-III. The main objective of LCR is to ensure that banks maintain sufficient liquid assets to meet obligations in a 30-day stress scenario. Banks have to maintain LCR of 100 per cent by January 2019.

The RBI’s reduction in risk-weights are for home loans in the ₹30-75 lakh and above ₹75 lakh categories. This will have two implications.

One, banks with relatively weak capital position can now look to incrementally lend to the housing segment. This will lead to increased competition in the space, benefiting customers.

Two, the savings on the capital front arising from lower risk-weights and across-the-board reduction in standard provisioning, can be transmitted to home loan borrowers in the form of lower lending rates.

The extent of pass-through will depend on each banks’ home loan portfolio (proportion of loans in the above ₹30-lakh category) and capital position, among other factors.

COMMENT NOW