Banks hike SLR holdings on improved liquidity

The improved liquidity conditions and extra government borrowings to fund the stimulus package have reversed the trend of drop in banks’ holdings of statutory liquidity ratio (SLR) securities.

The SLR holdings rose to 28.9 per cent by early January 2009 from 25.8 per cent in October 2008, according to Reserve Bank of India data.

Commercial banks’ holdings of SLR securities became more liquid on account of two factors at the beginning of third quarter. First, banks were allowed to use SLR securities to the tune of 1.5 per cent of their net demand and time liabilities (NDTL) to meet the funding needs of mutual funds, non-banking finance companies and housing finance companies, RBI said. Banks could borrow short term funds under special repo window by pledging the government securities.

Second, RBI reduced SLR requirement by one percentage point to 24 per cent of NDTL. This released more funds for credit deployment.

As a consequence, the commercial banks’ SLR holdings declined from 27.8 per cent in March 2008 to 25.8 per cent in mid-October 2008, reflecting the banks’ reliance on the repo facility under the LAF as liquidity conditions tightened.

With high-octane policy actions by RBI to release resources into the system, the liquidity in the system has improved significantly. Also there is moderation in credit demand, leaving banks with some additional resources which they parking in government bonds.

Bank of India Executive Director B A Prabhakar said the bank has increased the level of SLR investments in recent months. It is 3 per cent above the floor rate of 24 per cent up from policy of keeping one per cent above floor SLR rate.

“The credit off take is not buoyant and we have participated in the recent government auctions to mop up additional securities.”

A senior Canara Bank executive said it is maintaining a higher SLRs level, which is 3 per cent above the minimum prescribed level for banks. This translates into 27 per cent of net time and demand liabilities. The bank is working as a primary dealer and it has to mandatorily participate in government bond auctions. In absolute terms, the SLR portfolio above floor works out Rs 4,000 crore and the outstanding SLR bond holdings would be around Rs 40,000 crore, the executive said.

An HDFC Bank executive said as liquidity increased in the system, his bank has increased SLR investments to manage surplus liquidity in the December quarter.

An Axis Bank executive said, “Owing to the rally in bond prices, we have taken the advantage on our SLR investments in October-December 2008. In the last three months, we have increased our SLR holdings by 40-50 bps.”