President nod for SLR ordinance

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By The Telegraph Online
  • Published 24.01.07

New Delhi, Jan. 23 (PTI): President A.P.J. Abdul Kalam today gave assent to the ordinance giving more flexibility to the RBI on statutory requirement for banks to park their money in government bonds, official sources said.

The move comes ahead of credit review by the central bank on January 31.

The requirement, technically called statutory liquidity ratio, is currently fixed at 25 per cent. This implies that banks have to keep 25 per cent of their deposits in liquid assets like cash and gold but mainly government bonds.

The 25 per cent is the minimum limit below which the RBI cannot fix SLR at present. Today’s move will enable the RBI to cut SLR below 25 per cent. The ordinance, cleared by the cabinet earlier this month, would amend the Banking Regulation Act, 1949.

Since the larger amendment bill is opposed by the Left parties for its provision of lifting the 10 per cent cap on voting rights of foreign banks in private sector banks, the government has decided to bring the ordinance.

Bankers were curious to know whether the ordinance would come before the credit review or after it.

Bankers are for a cut in SLR, as it would release funds for the banking system. It is struggling with liquidity shortage after the RBI increased cash reserve ratio by 0.5 per cent, sucking Rs 13,500 crore from the system.

A 1 per cent cut in SLR means release of around Rs 25,000 crore in the system. With inflation touching a two-year high of 6.12 per cent, it would be difficult for the apex bank to cut SLR unless it takes other measures to arrest inflation.