A large chunk of new deposits find haven in G-Secs
2 min read 23 Aug 2020, 09:06 PM ISTThe RBI has mandated banks to maintain a statutory liquidity ratio of 18%. The SLR maintained by banks is usually much higher than this. Particularly after the covid-19 outbreak, banks took to maintaining an even higher SLR. Mint explains.
PremiumThe Reserve Bank of India (RBI) has mandated banks to maintain a statutory liquidity ratio (SLR) of 18%. The SLR maintained by banks is usually much higher than this. Particularly after the covid-19 outbreak, banks took to maintaining an even higher SLR. Mint explains
What is SLR and how has it changed?
Banks need to invest a certain proportion of their demand, time deposits in government securities (G-Secs) and other approved securities before offering credit. The SLR was at a high of 38.5% in the early 1990s. This was when banks in the country were government-owned. Since then, the SLR has been gradually brought down and now stands at 18%. Nevertheless, over the years, banks have typically ended up investing higher than required in government securities. Investment in government securities has gone through the roof since late March, in the aftermath of the spread of the covid-19 pandemic.
Where do investments in govt securities stand?
Between 27 March and 31 July, banks have raised fresh deposits worth ₹5.95 trillion. Of this, around ₹5.32 trillion has been invested in government securities and other approved securities. This essentially means that close to 89.4% of the fresh deposits have been invested in government and other approved securities, as against the mandated 18%. It tells us multiple things. One, that people have been reluctant to borrow after March, following the covid-19 outbreak. Secondly, banks have been reluctant to lend as a whole. Lastly, even when banks have wanted to lend, there has mostly been a dearth of good borrowers.
What does an 89.4% ratio of new deposits in G-Secs say?
Following the spread of coronavirus, and implications of curbs on activity, people began saving more, sensing a looming crisis. This had a direct impact on bank deposits. If we look at the comparable period in 2019, banks had raised fresh deposits worth ₹1.71 trillion then—around 29% of what they’ve raised in 2020. With this, investments in G-secs have shot up.
What else can we learn from this situation?
Banks take some time to give out deposits as loans. All the money that has come to them as deposits since March cannot be lent out all at once. In 2019-20, the lenders gave out loans worth ₹6 trillion. As mentioned earlier between end-March and end-July, banks ended up raising fresh deposits worth ₹5.95 trillion. Since the quantum of deposits is pretty large, banks will take time to lend out this money. However, until that happens, a lot of this money has ended up in safe government securities.
Is there good news in rising G-Sec deposits?
The ratio of fresh deposits invested in government securities since March-end has been coming down over the weeks. For the week ended 17 July, it had stood at 97.1%. This means that as the economy has gradually opened up, the banks have been able to lend out a greater proportion of fresh deposits raised since March. The ratio should come down further over time as the economy opens up and the banks are able to lend out more fresh deposits as loans.
Vivek Kaul is the author of Bad Money.
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