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Leveraging extra statutory liquidity ratio (SLR) securities, that are being touted by prime bankers as a possible supply of liquidity to assist credit score development, might pose a problem for banks at a time when rates of interest are on an upswing.
Catch-22 state of affairs
Specialists opine that banks are in a Catch-22 state of affairs, with all of them desirous to whittle down their surplus SLR securities (comprising Central and State authorities securities) to assist credit score development however rising yields usually are not providing them the chance.
In such a state of affairs, it might be an uphill job to promote these securities, as financial institution treasuries could be cautious of mark-to-market losses and consequent funding depreciation provisioning influence. Therefore, this might be one of many foremost explanation why banks are upping retail deposit charges after initially elevating solely bulk deposit charges. For instance, just lately, the State Financial institution of India upped retail time period deposit charges by as much as 80 foundation factors in view of deposit development lagging credit score development.
“There’s a clear hole between incremental credit score and deposit development. Deposits usually are not rising on the similar price as credit score. Clearly, Banks want deposits. Deposits may be raised solely by upping rates of interest. Banks are additionally holding extra SLR securities. However it isn’t a case of claiming {that a} financial institution can promote these securities as a result of all banks are holding extra SLR,” stated Madan Sabnavis, Chief Economist, Financial institution of Baroda.
He noticed that many of the deposit price hikes are occurring within the one to 2 years maturity buckets as banks don’t need to lock in larger deposit charges for longer tenors.
“If all banks need to promote extra SLR to assist credit score development, there must also be consumers. Patrons will hammer down costs. Financial institution treasuries is not going to need to promote at a loss,” stated an government with a mutual fund.
Credit score off-take improves
Based on the newest financial coverage report, reflecting the advance in credit score off-take, extra holdings of SLR securities of Scheduled Industrial Banks moderated to eight.8 per cent of their deposits as on August 26, 2022 from 10.4 per cent at end-March 2022.
Banks are required to speculate 18 per cent of the deposits they mobilise in SLR securities. Throughout occasions when credit score development is lackluster, they make investments over and above the regulatory minimal, resulting in extra SLR holdings.
Extra SLR holdings present collateral buffers to banks for availing funds below the liquidity adjustment facility(LAF) and are additionally a part of the liquidity protection ratio (LCR), per the report.
Moreover, the drawdown of extra money reserve ratio (CRR) and extra SLR holdings of banks are additionally serving to banks tiding over fund move mismatches.
Printed on October 26, 2022
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