Police sit at the entrance of the Reserve Bank of India (RBI) building in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)

RBI Allows Lenders To Dip Further Into SLR, Assures Of Liquidity Support

The Reserve Bank of India allowed lenders to dip further into statutory liquidity reserves, to help them meet their liquidity coverage ratio requirement.

The central bank said that banks could ‘carve out’ upto 15 percent of holdings under SLR to meet their LCR requirements, compared to 13 percent earlier. The measure will help reduce the need for statutory bond requirements of banks, and increase funds available for lending to their clients.

This should supplement the ability of individual banks to avail of liquidity, if required, from the repo markets against high quality collateral. This in turn will help improve the distribution of liquidity in the financial system as a whole.
Reserve Bank Of India Statement

This follows steps taken over the last few days by the RBI to ease liquidity in the market. In a release on Thursday, before markets opened, the RBI highlighted some of these steps.

The RBI said that:

  • It has conducted/will be conducting open market operation in successive weeks on September 19 and Sept. 27, 2018.
  • RBI has also provided a liberal infusion of liquidity through term repos in addition to the usual provision via the Liquidity Adjustment Facility.
  • As of Sept. 26, banks had availed of Rs 1.88 lakh crore through term repos from the RBI.
“As a result of these steps, the system liquidity is in ample surplus.” Besides, RBI said it stands ready to meet the durable liquidity requirements of the system through various available instruments.

The RBI and capital market regulator Securities and Exchange Board of India on Sunday said they were closely monitoring activities in the financial markets and ready to take appropriate actions, if required.

The statement followed concerns that tight liquidity conditions, along with a trust deficit towards non-bank lenders, could lead to a liquidity squeeze. Banks and mutual funds have turned nervous about lending to non-banking financial companies after Infrastructure Leasing & Financial Services (IL&FS) and its subsidiaries started defaulting on debt securities, despite having strong ratings until recently.

While the RBI is taking steps to ensure that the system liquidity remains in balance, the question is whether banks will on-lend to NBFCs, said an analyst speaking on condition of anonymity.

Relaxation for liquidity coverage ratio calculations would provide immediate relief to the banking system, which has been facing tight domestic liquidity, Madhavi Arora, economist at Edelweiss Securities told Bloomberg News. She, however, added that the funding pressure faced specifically by NBFCs may require a more targeted approach from the authorities.

Also read: RBI Needs To Step Up Pace Of Liquidity Infusion, Say Analysts