Reverse repo auctions help foreign banks meet SLR

Many foreign banks are doing a fine balancing act between maintaining statutory liquidity ratio (SLR) and ensuring enough liquidity to meet resource needs for loan disbursements.

Their statutory liquidity ratio (SLR) investments is slightly below the minimum 25 per cent of net demand and time liabilities (deposits), but technically these are in compliance with the statutory requirement at the end of the fortnightly reporting on Friday.

These banks make use of a leeway provided by the reverse repo auctions under the Reserve Bank of India's (RBI) liquidity adjustment facility.

These banks put money in reverse repo auctions to the extent required to show they have invested the minimum required in government and other SLR securities, banking sources said.

This helps these banks to report compliance with the SLR regulation every alternate reporting Friday, as the securities they get from RBI in exchange for excess cash deposited with RBI are eligible for SLR purposes.

All commercial banks report to the RBI their compliance with SLR and cash reserve ratio (CRR) regulations and details of their deposits and advances portfolios every alternate Friday.

Bankers and traders said the strategy adopted by foreign banks is a flawless alternative. "This is not new but is now gaining popularity due to increasing opportunity to lend funds more profitably and reluctance of banks to invest in gilts. Investment in gilts also locks money in securities which are exposed to the risk of depreciation in the current rising interest rate scenario," they said.

While the banks earn by pledging funds under LAF at 6 per cent. Several public sector banks and private sector banks have also reduced their SLR holdings close to the minimum required, but are not as distressed as their foreign counterparts and do not have to do the jugglery.

The only risk in managing this fine balance is in the event of RBI deciding to reject bids received at reverse repo auctions.

The foreign banks would then have to make alternative arrangements to show compliance with SLR requirement.

The less adventurous banks tread safer avenues. They buy treasury bills to maintain SLR. This also helps them avoid losses in investment portfolios.