Indian banks may not take advantage of the RBI’s decision to cut the statutory liquidity ratio (SLR) immediately as most banks have government securities holdings which are far higher than current SLR requirements.
As of June 29, 2012, the SLR ratio was close to 30 per cent for scheduled commercial banks, a good six percentage points higher than the mandated level of 24 per cent. The lower SLR ratio of 23 per cent would release Rs 60,000 crore in bank funds.
Whether banks use the excess SLR funds for lending will depend on credit offtake, which is now weak. However, such lending will help improve margins for banks when the demand for credit picks up in the second half of the year. Banks with high-cost deposits will benefit more from the SLR cut.
The SLR cut will also allow banks to lower their cost of funds. Banks can only park excess government securities (above statutory requirement) in the repo window, and for additional borrowing they need to tap marginal standing facility (at 9 per cent). Therefore, lower SLR may provide relief to banks.
Release of government securities would also prompt banks to go the repo window rather than the call money market for short-term funds.
Even as the cut in SLR ratio may turn out to be positive for banks over a longer-term, in short-term it may add to gilt supplies and pressure gilt prices, leading to treasury losses for banks.The yields on gilts after falling 60 basis points in the first quarter of this fiscal, have already risen by 20 basis points this month. Therefore, the RBI needs to come up with more open market operations to curtail the demand for gilts.
As the Government has already crossed 37 per cent of its fiscal deficit target this year, government borrowing is expected to rise. Given this backdrop, SLR cut makes it tougher for the RBI. .