In order to ensure credit flow to productive sectors of the economy, Reserve Bank of India (RBI) has yet again stressed on the need to bring down the level of mandatory holding of government securities by banks, in a calibrated way, to what is strictly needed from a prudential perspective.
Currently, the statutory liquidity ratio (SLR), the portion of banks’ deposits in government securities (G-secs), stands at 23%. However, most banks park much higher proportion in government bonds as these investments are risk free and offer stable returns.
As of November 1, the banking sector as a whole had parked almost 30% of the deposits in government bonds, which is 7 percentage points in excess of the mandated requirement. Due to this practice, lending to the commercial sector tends to get restricted.
Further, this is not for the first time that RBI has emphasized the need to reduce the level of mandatory holding of government securities by banks. RBI’s new governor, Raghuram Rajan, while taking charge on September 4, also raised this issue.
Additionally, India’s Apex Bank in its "Trend and Progress of Banking in India 2012-13" report, highlighted that the scope for such reduction will increase as government finances improve. Further, it added that as when the penetration of other financial institutions such as pension funds and insurance companies increases, it will be possible for commercial banks to reduce the need to invest in government securities.