Banks urged to beef up SLR reserve

The Reserve Bank of India (RBI) deputy governor Rakesh Mohan today said banks could face challenges in managing liquidity if they continued to fund credit growth through sale of excess statutory liquidity ratio (SLR) investments.

Addressing a seminar on money and finance at the Indira Gandhi Institute of Development Research (IGIDR), Mohan advised banks to always maintain SLR portfolio over and above the prescribed minimum 25 per cent in order to be able to tap the liquidity adjustment facility (LAF) in situations of liquidity crunch. Banks average SLR stands around 31 per cent, down from over 40 per cent as they unwound their investments to fund credit demand.

Mohan said RBI operates liquidity adjustment facility (LAF) to absorb and/or inject liquidity in the financial system.

It uses repo window to provide resources to banks against collateral of government securities. The government has already mooted an amendment to remove the statutory floor of 25 per cent for SLR holdings and empower RBI to decide the minimum.

Referring to the RBI's role in the primary market for government securities, Mohan said from April 1, RBI would stop acting as a underwriter for primary issues in line with provisions Fiscal Responsibility and Budget Management (FRBM) act and instead would be active in the secondary market for securities.

Finance Minister P Chidambaram, speaking to reporters in Bangalore, said RBI governor would decide on the bankers' demand for a one percentage point cut in cash reserve ratio (CRR).

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RBI brass to meet banks, NBFCs today

The Reserve Bank of India (RBI) brass will have a series of meetings with banks and non-banking finance companies tomorrow in the run-up to the credit policy which will be unveiled on April 18.

As part of the exercise, RBI governor Y V Reddy will meet managing committee members of Indian Banks' Association (IBA). The meeting was fixed over a fortnight ago and is not any special attempt at thrashing out liquidity issues, banking sources said.

The consultations with IBA will be followed with a series of meetings with the Foreign Exchange Dealers' Association of India (FEDAI), the Fixed Income Money Markets and Derivatives Association of India (FIMMDA), NBFCs and co-operative banks on the same day.

"This was a pre-decided meeting, which is due every quarter and has nothing to do with the meeting that we had with the finance minister earlier this week," said the chairman of public sector bank.

IBA will be represented by its chairman, A K Purwar, the chairman of State Bank of India, IBA deputy chairman, V P Shetty, the chairman of IDBI, K V Kamath, managing director and CEO of ICICI Bank, Sanjay Nayar, India head of Citigroup and A K Khandelwal, chairman of Bank of Baroda.

The chiefs of public sector banks had pressed for a cut in cash reserve ratio (CRR) to ease slightly liquidity tightness. The bankers had conveyed to the finance minister that there was a Rs 1,00,000 crore liquidity gap in the banking system.

However, the RBI is unlikely to accept the demand for a CRR cut, sources said.