SLR cut credit positive for banks, says Moody's

The Reserve Bank decision to reduce the statutory liquidity ratio (SLR) is credit positive for banks as it would help them manage liquidity and increase profitability, Moody's Investors Service said today.

hidden February 09, 2015 18:39:44 IST
SLR cut credit positive for banks, says Moody's

Mumbai: The Reserve Bank decision to reduce the statutory liquidity ratio (SLR) is credit positive for banks as it would help them manage liquidity and increase profitability, Moody's Investors Service said today.

SLR cut credit positive for banks says MoodysLast week, RBI reduced SLR, the minimum amount of Government securities (G-secs) that banks have to hold as a percent of their deposits, by 50 basis points (bps) to 21.50 percent.

"It is credit positive for banks because it will provide them with greater flexibility to manage liquidity and improve profitability," the international rating agency said in a report here.

Since 2010, the RBI has cut SLR by 350 bps.

The report said domestic banks historically have had high SLR requirements because it allowed the government to fund its borrowing requirements through allocation of a large part of deposits by banks to buy these instruments.

The report said although banks typically hold G-secs as part of their liquidity management, the required amount that they must hold under SLR guidelines often exceeds the requirement if they are managing liquidity without these norms.

Moreover, SLR holdings, despite consisting of liquid instruments, have not helped support banks' liquidity management as they had to maintain these levels of holdings under most circumstances, it said.

"Also, holding such a large amount of relatively low-yielding government bonds lowers profitability," Moody's said, adding the recent cut also makes it easier for banks to comply with the RBI's liquidity coverage ratio (LCR) norms.

Last June, the RBI introduced LCR norms, which would be implemented in a phased manner with a requirement of 60 percent from this January. The requirement would rise in equal steps to reach 100 percent by January 2019.

Moody's said banks face difficulties in complying with LCR norms because for the purposes of calculating high-quality liquid assets, only those holdings of G-secs that exceed the minimum SLR requirement are eligible.

"With this reduction in the SLR, amount of eligible securities for LCR computations will increase."

Banks' holdings of G-secs typically exceed minimum SLR norms by a few percentage points. "We expect all rated banks to benefit from this development," it added.

PTI

Updated Date:

also read

Bank holidays in May 2021: Banks to remain shut for 12 days this month; check details here
India

Bank holidays in May 2021: Banks to remain shut for 12 days this month; check details here

Weekly offs will be on five Sundays — 2 May, 9 May, 16 May, 23 May, and 30 May, and two Saturdays — 8 May and 22 May

Sensex surges over 350 points in early trade; Nifty climbs 114.85 points, tops 14,900
Business

Sensex surges over 350 points in early trade; Nifty climbs 114.85 points, tops 14,900

Dr Reddy's was the top gainer in the Sensex pack, followed by ONGC, HDFC, IndusInd Bank, ICICI Bank, Sun Pharma and Kotak Bank

RBI announces loan restructuring for individuals, MSMEs hit by COVID-19; eases KYC norms
India

RBI announces loan restructuring for individuals, MSMEs hit by COVID-19; eases KYC norms

RBI Governor Shaktikanta Das said food and fuel inflation have pushed core inflation, adding that the expected normal monsoon forecast should ease the prevalent condition