The securities are held based on the expected net cash outflow for the next 30 days. This holding differs from bank to bank as the net outflows varies. So while SLR is static at 19.5 per cent, LCR is not.
So far banks could show 13 per cent of the liquidity kept under statutory liquidity ratio (SLR) as part of their LCR. This has now been raised to 15 per cent, effective October 1. So banks can now “carve out” up to 15 per cent of holdings under the SLR to meet their LCR requirements. This will leave them with funds to lend elsewhere.
Ananth Narayan, professor at the SPJIMR, told The Telegraph that while Thursday’s move by the RBI was positive in terms of sentiment, only short-term liquidity had been made available. “This does not necessarily address the question of flow of credit to the financial sector.’’
Telegraph picture
The RBI eased cash requirements for banks on Thursday and said it would provide “durable liquidity” through various instruments.
The central bank’s action on the liquidity front comes a day after the government hiked import duties on 19 items in a bid to prop up the rupee. Liquidity has been tight because of advance tax outflows and RBI intervention in the forex markets.
Following up on earlier attempts to calm investors’ fears about liquidity, the RBI on Thursday eased banks’ liquidity coverage ratio (LCR) norms, allowing them to include up to two percentage points more of government securities in their statutory liquidity ratio reserves to meet their LCR quota.
The move will lower banks’ demand for such liquid assets (thus freeing up liquidity which can be on-lend), while those holding surplus securities can also raise short-term money by accessing the RBI’s repo window by pledging these gilts as collateral.
“This should supplement the ability of individual banks to avail of liquidity, if required, from the repo markets by pledging these high-quality collateral. This, in turn, will help improve the distribution of liquidity in the financial system as a whole,’’ the RBI said.
The LCR, which is a fallout of the 2007 global financial crisis, mandates that banks must have sufficient amount of liquid assets to survive an acute stress scenario lasting for 30 days, during which corrective actions can be taken.