New Delhi: A key government department has advocated scrapping the rule mandating banks to invest a fixed portion of their deposits in government bonds, a view that has found support in the N.K. Singh committee reviewing rules on fiscal discipline.
In its discussions with the committee, the department of financial services in the finance ministry suggested an end to statutory liquidity ratio (SLR) requirements that force banks to buy bonds, reducing their lending capability. The committee led by Singh, a former revenue secretary, is reviewing India's rules governing fiscal responsibility and budget management (FRBM).
Last April, the Reserve Bank of India (RBI) started reducing SLR by 0.25 percentage point every quarter, and allowed over half of these holdings to meet the Basel-mandated liquidity coverage ratio.
Currently, the SLR stands at 20.5% of total bank deposits.
“Economists generally advocate quick SLR phase out as one of the policy instruments to end the lazy/cautious banking syndrome and also make the governments more receptive to discipline of open markets rather than relying on financial repression. Presently—when most banks are holding government securities in excess of minimum SLR—it is the opportune time to wind up SLR,” the committee report said, quoting the department’s view.
Apart from Singh, other members of the committee including chief economic adviser in the finance ministry Arvind Subramanian, National Institute of Public Finance and Policy director Rathin Roy, Reserve Bank of India governor Urjit Patel and former finance secretary Sumit Bose met officials of key central government departments to seek their views on various fiscal policy issues.
The members also sought the opinion of economic affairs secretary Shaktikanta Das on whether SLR should be dispensed with.
“Urjit Patel pointed out that SLR was partly used to hold government bonds. Secretary (economic affairs) mentioned that as on date, most banks have more than the 21% stipulated SLR. However, before taking any call on the issue, the role of SLR as assets in the context of huge NPAs (non-performing assets) of banks will need to be kept in view,” the report said, citing the interaction between Das and members of the committee.