RBI for reduction of bank investments in govt securities

Credit needed for productive sectors

 The Reserve Bank of India is planning to reduce banks' requirement of investing in government securities (G-Secs) in a calibrated way to ensure the credit flow to productive sectors of the economy.

 To this effect, RBI said in the "Report on Trend and Progress of Banking in India – 2012-13" released on Thursday, which spelled out that “One of the mandates for the Reserve Bank in the RBI Act is ensuring the flow of credit to productive sectors of the economy.”

The report made it clear the necessity to reduce banks' requirements of investing in g-secs in a calibrated way, to what is strictly needed from a prudential perspective. "It is recognised that the scope for such reduction will increase as government finances improve," it added. Further, it said: "...as the penetration of other financial institutions, like pension funds and insurance companies increases, it will be possible to reduce the need for commercial banks to invest in g-secs.”

 The Statutory Liquidity Ratio (SLR), the portion of total deposits banks are required to park in G-Secs is currently at 24.5 per cent. “Current regulations require banks to bring down their SLR securities in Held To Maturity (HTM) category from 25 per cent to 23 percent of their Net Demand and Time Liabilities (NDTL) in a progressive manner in a prescribed time frame. The requirement stood at 24.5 percent as at end June 2013.

It has now been decided to relax this requirement by allowing banks to retain SLR holdings in HTM category at 24.5 per cent until further instructions,” RBI had said in August.  Experts see the reduction in banks' requirement of investing in g-secs gradually so that the government borrowing programme is not hampered.

“The only way to do this is to do it in a calibrated manner over a period of time. The government borrowing programme will get disrupted if it is done abruptly. The combined ratio of CRR plus SLR has to be brought down to a reasonable level.

It has to be brought down to the prudential limits as per the Basel III requirements,” said Kotak Mahindra Bank President (group treasury and global markets) Mohan Shenoi said.