Leveraging excess statutory liquidity ratio (SLR) securities, which are being touted by top bankers as a potential source of liquidity to support credit growth, could pose a challenge for banks at a time when interest rates are on an upswing. 

Catch-22 situation

Experts opine that banks are in a Catch-22 situation, with all of them wanting to whittle down their surplus SLR securities (comprising Central and State government securities) to support credit growth but rising yields are not offering them the opportunity.

In such a situation, it would be an uphill task to sell these securities, as bank treasuries would be wary of mark-to-market losses and consequent investment depreciation provisioning impact. Hence, this could be one of the main reasons why banks are upping retail deposit rates after initially raising only bulk deposit rates. For example, recently, the State Bank of India upped retail term deposit rates by up to 80 basis points in view of deposit growth lagging credit growth. 

“There is a clear gap between incremental credit and deposit growth. Deposits are not growing at the same rate as credit. Obviously, Banks need deposits. Deposits can be raised only by upping interest rates. Banks are also holding excess SLR securities. But it is not a case of saying that a bank can sell these securities because all banks are holding excess SLR,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

He observed that most of the deposit rate hikes are happening in the one to two years maturity buckets as banks don’t want to lock in higher deposit rates for longer tenors.

“If all banks want to sell excess SLR to support credit growth, there should also be buyers. Buyers will hammer down prices. Bank treasuries will not want to sell at a loss,” said an executive with a mutual fund.

Credit off-take improves

According to the latest monetary policy report, reflecting the improvement in credit off-take, excess holdings of SLR securities of Scheduled Commercial Banks moderated to 8.8 per cent of their deposits as on August 26, 2022 from 10.4 per cent at end-March 2022. 

Banks are required to invest 18 per cent of the deposits they mobilise in SLR securities. During times when credit growth is lackluster, they invest over and above the regulatory minimum, leading to excess SLR holdings.

Excess SLR holdings provide collateral buffers to banks for availing funds under the liquidity adjustment facility(LAF) and are also a component of the liquidity coverage ratio (LCR), per the report.

Furthermore, the drawdown of excess cash reserve ratio (CRR) and excess SLR holdings of banks are also helping banks tiding over fund flow mismatches. 

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