RBI to reduce "pre-emption" curbs on banks, infuse efficiency
06 Aug 2014
A day after the Reserve Bank of India (RBI) reduced the statutory liquidity ratio (SLR) requirement of banks by 0.50 percentage points, thereby helping to release an additional Rs40,000 crore into the system (RBI cuts SLR by 50 bps to 22%, other rates unchanged), governor Raghuram Rajan today said RBI would like to reduce "pre-emptions" in order to make the banking system more efficient.
While banks will have to carry on with the SLR and other mandatory reserve requirements for a longer period, Rajan said, a reduction in these ''pre-emptions'' will offer banks the flexibility to manage their finances better in times of higher credit demand.
The RBI governor also said he would streamline the current order of priority sector lending to make lending more efficient.
"The broader, longer term programme of five years is that we should reduce the amount of pre-emptions we have in the system, including SLR, and make a more effective priority sector lending (PSL) process," Rajan said during a post-policy analysts call.
At present banks have to keep 22 per cent in SLR and another 4 per cent in cash reserve ratio and out of the remaining 74 per cent of NDTL, 40 per cent has to be reserved for lending to the weaker sections under priority sector lending, leaving just 44 per cent of the NDTL for effective lending.
Rajan drew attention towards the Nachiket Mor committee report that says the proposed small banks should also comply with the priority sector lending target of 40 per cent and set up a quarter of their branches in rural un-banked areas.
RBI, he said, is trying to make the entire process more efficient and effective.
"These are necessary changes in the system and should not be seen as tied to the monetary cycles," he added.
Also, Rajan said, various stakeholders in the banking system have been expressing reservations about the pre-emptions like the SLR and CRR, adding that the 0.50 per cent reduction in SLR announced on Tuesday has the potential to release an additional Rs40,000 crore into the system.
The governor, however, said the 0.50 percentage reduction in SLR is not going to have any real impact in the immediate future and that banks will continue carrying excess SLR for the "foreseeable future".
"Going forward, we would investigate the conditions in the credit market as well as the bond market and make appropriate decisions at that point," Rajan said.
He also said that a reduction in ''pre-emptions'' will not affect the market for government securities as banks will continue to be present in the government securities market.
He said besides banks, foreign investors have come close to breaching the limits on G-Sec investments and, with the market maturing, many other domestic institutions such as institutional investors, pension funds and insurance companies will look at deploying their money in this market.
