Banks see CRR and SLR as statutory cost to be in business of financial intermediation, while RBI impound good percentage of Bank's NDTL for systemic risk protection. There is also different opinions on the need to impound 26% of deposits in the form of 4% CRR (in cash at 0%) and 22% SLR (in State and Central government bonds at relatively low yield) when Banks pass-through this cost to borrowers. The cost to borrowers is priced at deposit cost + statutory cost + operating cost + RoA margin, with top up cost for liquidity, credit and tenor premium. If SLR is seen as cost, why Banks derive comfort from maintaining huge excess SLR portfolio of 6-8% over the mandatory limit? The amount parked idle with RBI (and out of the system) is huge at more than Rs. 4 Trillion. Banks take the easy way to reduce the pain from holding excess SLR baggage by cutting the cost on incremental deposit acquisition to below 8.25%, at par with Gilt yield across tenors! So, the burden of low credit off-take and risk-aversion is borne by retail depositors, who look upto RBI for relief. This is one of the reason for RBI reluctance to cut policy rates in hurry with preference to be in wait till credit demand (at acceptable quality) picks up from supply-side capacity expansion.
Are there other ways to discourage holding of excess SLR beyond tolerance limit over the mandatory requirement? RBI does not encourage excess CRR viewing it as inefficient cash management by Banks; if that be the case, pile-up of excess SLR is inefficient fund management, taking deposits more than required for financial intermediation!
What can be done? Can CRR & SLR be made fungible with cap on aggregate holding and penalty on excess held? Impact of this will be immediate release of CRR cash into the system and/or sale of SLR securities. This can lead to increased lending appetite at diluted credit risk premium, thereby lower lending rate! It will also result in normalisation of the yield/rate curve across tenors, building long term liquidity (and time-value) premium. Going forward, if the Government sticks to fiscal prudence, market dependence to fund deficit may be in alignment with incremental SLR requirement for deposit growth. Alternatively, excess SLR can be pushed to Government guaranteed fund for supporting scaling up of economic and social infrastructure.
Just thinking aloud on ways and means to divert the huge idle funds for supporting creation of productive economic assets. As of now, liquidity is in plenty at affordable rates, but no lending appetite for those who need!
Food for thought to Modi & Rajan!
Moses Harding
if RBi charges penalty for holding excess SLR will consumers sees lower lending rate ?
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