Get rid of SLR, end loan waivers: RBI committee

January 11, 2014

A high-level panel of the Reserve Bank of India (RBI) has suggested that the central bank should gradually abolish the Statutory Liquidity Ratio (SLR), the portion of deposits that banks must compulsorily keep in government securities.
At present, SLR is at 23% while most banks keep it around 27% as state-backed bonds often provide attractive rates at low risk.
As per the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households, headed by Nachiket Mor (former executive director ICICI Bank):

SLR should be gradually abolished
A Separate category of banks should be created to cater to low-income households with a minimum entry capital requirement of Rs. 50 crore — 1/10^th of the currently mandatory Rs. 500 crore.
Banks should provide facilities for withdrawal, payment and deposit within 15 minutes walking distance anywhere in the country.
All Indians above 18 to have a “full-service, safe, and secure electronic bank account” by 2016.
The priority sector lending cap should be increased from the current 40% to 50%.
Interest subsidies and loan waivers should be abolished.

What is SLR?

Apart from keeping a portion of deposits with the RBI as cash (CRR), banks are also required to maintain a minimum percentage of their net demand and time liabilities with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio.
Example: If you deposit Rs. 100/- in bank, CRR being 9% and SLR being 11%, then bank can use 100-9-11= Rs. 80/- for giving loan or for investment purpose.
SLR is the requirement imposed by the regulator on commercial banks that compels them to invest a percentage (currently 23%) of their Net Time and Demand Liabilities (NDTL) in approved government securities. Through this, today, 23% all the resources – deposits and borrowings – mobilised by commercial banks are invested in government securities.
The Narasimham Committee – I (1991) had recommended scaling down SLR from a high of 38.5 per cent to 25 per cent and the RBI moved in a calibrated fashion in that direction. SLR is at 23 per cent with effect from August 11, 2012. A reference book, popularly known in the teaching-academic circle as Datt & Sundharam Indian Economy by Gaurav Datt and Ashwani Mahajan mentions as follows: “There is now a demand to abolish SLR altogether”.

Purpose/ Objective of SLR

SLR is aimed at serving three purposes:

(i) it is an instrument of credit control;
(ii) it works as a cushion against the possibility of bank failures; and
(iii) it is a conduit for financing government deficits. Out of these, SLR has been serving overwhelmingly the third purpose.

As a credit control instrument, it is relatively blunt and being used rather infrequently. Between October 25, 1997 and August 11, 2012 SLR has been changed only five times from 25% to 23%.
As far as its function as a cushion against bank failures is concerned, it is practically meaningless because weak commercial banks are not allowed to fail by the Government/RBI which is guided by the too-big-to-fail doctrine while resolving bank failures.
Therefore, one may conclude that the biggest casualty of abolition of SLR would be government borrowing programmes which are of gigantic size every year. So the basic question is who will subscribe to such borrowings? The answer will determine the fate of the banking structure, post-SLR abolition.

What do the supporters of ‘SLR abolition’ say?

Abolition of SLR would dramatically free up nearly a quarter of deposits for industrial and consumer loans — and possibly lower interest rates. As per some experts, reducing SLR on a gradual basis would be healthy for the financial sector and this would allow banks to direct their resources to a more productive use.

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