RBI Plans on to reduce banks' reliance on G-secs gradually

Will help ensure flow of credit to productive sectors of the economy

The Reserve Bank of India (RBI) is planning to reduce banks’ requirement of investing in government securities (G-secs), in a calibrated manner.

“One of the mandates for the Reserve Bank in the RBI Act is ensuring the flow of credit to productive sectors of the economy. In this context, it is necessary 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 the scope for such reduction will increase as government finances improve. Further, as the penetration of other financial institutions such as pension funds and insurance companies increases, it will be possible to reduce the need for commercial banks to invest in G-Secs,” RBI said in its Trend and Progress of Banking in India 2012-13 report.

Currently, the statutory liquidity ratio (SLR), the portion of deposits banks have to have as G-Secs, is 24.5 per cent.

Experts feel the move to reduce banks’ requirement of investing in G-secs gradually is to ensure the government’s borrowing programme isn’t affected. “The only way to do this is to do it in a calibrated manner, over a period of time. The government’s borrowing programme will be disrupted if it is done abruptly. The combined ratio of cash reserve ratio (CRR) and SLR has to be reduced to a reasonable level. It has to be brought down to prudential limits, according to Basel-III requirements,” said Mohan Shenoi, president (group treasury and global markets), Kotak Mahindra Bank.

Currently, CRR stands at four per cent of banks’ net demand and time liability .

A few experts say further reduction of the requirement to invest in G-secs is more likely when the limit for foreign institutional investors (FIIs) for investing in these securities is enhanced. “To be Basel-III compliant, RBI would want to reduce the SLR portion. The process will be very gradual. Once the gates are opened for FIIs to investment more, the reliance on banks may probably be reduced for government borrowing,” said S Srinivasaraghavan, head of treasury at Dhanlaxmi Bank.

Currently, the cap on investments by foreign entities in G-secs stands at $30 billion.