Reserve Bank of India (RBI) governor D Subbarao on Friday said the minimum statutory liquidity ratio (SLR) requirement should be reduced, as it led to high government debt holdings by Indian banks.
According to an RBI mandate, all banks should maintain at least 24 per cent of net demand and time liabilities (NDTL) of government securities as SLR.
Subbarao said the 24 per cent level was considered “high” by some. “Going forward, it needs to be reduced,” he said, adding there were preconditions to be met with before reducing SLR. He, however, did not specify these.
Additional securities can be used by banks to borrow funds from RBI under the Liquidity Adjustment Facility. Banks can also tap the marginal standing facility to borrow funds up to one per cent of NDTL at a penal rate if bond holdings fall below 24 per cent. Keeping the tight liquidity conditions in mind, RBI had last month relaxed the norm and allowed banks to use the additional window to borrow funds in exchange of excess securities.
Subbarao said the SLR mandate was one of the two reasons why Indian banks’ government debt holding was high. The other was the country’s high fiscal deficit.
Government borrowing through the sale of dated securities was twice scaled up so far this financial year. The government is now expected to borrow Rs 5.1 lakh crore, against Rs 4.17 lakh crore budgeted for 2011-12.
The RBI governor said infrastructure lending and financial inclusion were the major challenges faced by the Indian banking sector.