Government is liberalising SLR mechanism
An ordinance is on the cards to reduce Statutory Liquidity Ratio (SLR) ceiling limits so as to free up more funds for the industry. The ordinance would amend the Banking Regulation Act, 1949 to give RBI freedom in fixing the floor and ceiling levels of the SLR – now the floor and ceiling are stipulated in the Act itself. Presently, the Act stipulates 25% floor and 40% ceiling rates for SLR. According to these statutory SLR requirements, banks must keep a stipulated proportion of their total demand and time liabilities, in the form of liquid assets, namely cash, gold and approved securities. Investment in these securities amounts to mandated lending to the government, leaving that much less to the banks for advancing loans.
Present growth in off-take of loans at 25% is still running ahead of the 20% projected by the central bank earlier this fiscal. But, the growth in deposits is not commensurate with the scorching pace of loan growth. Over the last year or so, the high credit growth was financed by banks partly by offloading part of their investments in government securities in excess of SLR norms. During the current fiscal also the banks are following same procedure but are now close to the minimum statutory requirements. This implies that the banks can lend more in future provided accretion to their deposits is substantial. With banks finding it difficult to mobilize deposits in short term, relaxing the regulatory norms for reserves seems to be the only option left for the government. Paring the SLR would fit in with the planned liberalization of financial sector. However, with a reduction in SLR, the cost of borrowing may go up as the government will have to borrow from the market at higher rates, which will have a impact on the fiscal discipline of the government. Hence, such a reduction in SLR holdings would have to be consistent with a lower fiscal deficit.
In the mean time, Government wants to introduce fiscal incentives so to make bank deposits attractive for middle class, who are increasingly diverting their funds from traditional investments to other green pastures like real estate, stocks and mutual funds. Recently, government has allowed income tax deduction for the interest earned on fixed deposits with maturity period of five years or more, subject to the total ceiling of Rs. 1.50 lakhs for all eligible investments. The government is also thinking to exempt the interest income on deposits to the extent of Rs. 15,000 per annum per person. This proposal may come through in our next budget to be presented in the Parliament on February 28,2007.
Glossary :-
Demand Liabilities
'Demand Liabilities' include all liabilities which are payable on demand and they include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the Banking System should be shown against liability to others.
Time Liabilities
Time Liabilities are those which are payable otherwise than on demand and they include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit if not payable on demand, deposits held as securities for advances which are not payable on demand, India Millennium Deposits and Gold Deposits.
Statutory Liquidity Ratio (SLR)
In terms of Section 24 (2-A) of the B.R. Act, 1949 all Scheduled Commercial Banks, in addition to the average daily balance which they are required to maintain under Section 42 of the RBI Act, 1934, are required to maintain in India,
a) in cash, or b) in gold valued at a price not exceeding the current market price, or c) in unencumbered approved securities valued at a price as specified by the RBI from time to time.
an amount which shall not, at the close of the business on any day, be less than 25 per cent or such other percentage not exceeding 40 per cent as the RBI may from time to time, by notification in gazette of India, specify, of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight,
At present, all Scheduled Commercial Banks are required to maintain a uniform SLR of 25 per cent of the total of their demand and time liabilities in India as on the last Friday of the second preceding fortnight which is stipulated under section 24 of the B.R. Act, 1949.
Present growth in off-take of loans at 25% is still running ahead of the 20% projected by the central bank earlier this fiscal. But, the growth in deposits is not commensurate with the scorching pace of loan growth. Over the last year or so, the high credit growth was financed by banks partly by offloading part of their investments in government securities in excess of SLR norms. During the current fiscal also the banks are following same procedure but are now close to the minimum statutory requirements. This implies that the banks can lend more in future provided accretion to their deposits is substantial. With banks finding it difficult to mobilize deposits in short term, relaxing the regulatory norms for reserves seems to be the only option left for the government. Paring the SLR would fit in with the planned liberalization of financial sector. However, with a reduction in SLR, the cost of borrowing may go up as the government will have to borrow from the market at higher rates, which will have a impact on the fiscal discipline of the government. Hence, such a reduction in SLR holdings would have to be consistent with a lower fiscal deficit.
In the mean time, Government wants to introduce fiscal incentives so to make bank deposits attractive for middle class, who are increasingly diverting their funds from traditional investments to other green pastures like real estate, stocks and mutual funds. Recently, government has allowed income tax deduction for the interest earned on fixed deposits with maturity period of five years or more, subject to the total ceiling of Rs. 1.50 lakhs for all eligible investments. The government is also thinking to exempt the interest income on deposits to the extent of Rs. 15,000 per annum per person. This proposal may come through in our next budget to be presented in the Parliament on February 28,2007.
Glossary :-
Demand Liabilities
'Demand Liabilities' include all liabilities which are payable on demand and they include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the Banking System should be shown against liability to others.
Time Liabilities
Time Liabilities are those which are payable otherwise than on demand and they include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit if not payable on demand, deposits held as securities for advances which are not payable on demand, India Millennium Deposits and Gold Deposits.
Statutory Liquidity Ratio (SLR)
In terms of Section 24 (2-A) of the B.R. Act, 1949 all Scheduled Commercial Banks, in addition to the average daily balance which they are required to maintain under Section 42 of the RBI Act, 1934, are required to maintain in India,
a) in cash, or b) in gold valued at a price not exceeding the current market price, or c) in unencumbered approved securities valued at a price as specified by the RBI from time to time.
an amount which shall not, at the close of the business on any day, be less than 25 per cent or such other percentage not exceeding 40 per cent as the RBI may from time to time, by notification in gazette of India, specify, of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight,
At present, all Scheduled Commercial Banks are required to maintain a uniform SLR of 25 per cent of the total of their demand and time liabilities in India as on the last Friday of the second preceding fortnight which is stipulated under section 24 of the B.R. Act, 1949.
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