Excess statutory liquidity ratio (SLR) holding, delaying giving final effect to the draft liquidity coverage ratio (LCR) guidelines and open market operation (OMO) purchase of Government Securities (G-Secs) have come as a blessing in disguise for Banks amid deposit growth lagging credit growth.
After RBI Governor Sanjay Malhotra, at his first bi-monthly monetary policy press meet on February 7th, assured that Banks will be given sufficient time to transition to a revised LCR regime, they are tendering G-Secs at OMO auctions without worrying about this ratio getting impacted, according Bank treasury officials.
The huge response to the four OMO purchase auctions conducted so far as part of liquidity injection measures announced by RBI on January 27, 2025 and March 5, 2025 says it all.
To ensure that their offers to draw liquidity are successful, Banks undersold G-Secs about 10-20 paise lower than the prevailing marlet price, said a Bank treasury head.
Banks offered G-Secs whose face value was 2.5 to 6 times the amount the central bank was willing to infuse into the banking system via the auctions.
Overall, RBI infused ₹1.50 lakh crore via the OMO purchase auctions so far. One more auction is scheduled on March 18th (for ₹50,000 crore).
Excess holdings of SLR (G-Secs and State Development Loans) securities by Scheduled Commercial Banks (SCBs) as on September 6, 2024 were at 8.8 per cent of their deposits, up from 8.6 per cent at end-September 2023, per RBI’s October 2024 monetary policy report.
Out of every Rs 100 deposit mopped up by a Bank, it has to park at least 18 per cent of the amount (or ₹18) in SLR securities. Further, 4 per cent (or ₹4) of the deposit has to be parked with RBI as cash reserve ratio. The balance 78 per cent (or ₹78) is available for credit deployment.
By selling their excess G-Sec holding at the OMO purchase auctions conducted by RBI, Banks are able to draw durable liquidity to support credit growth. This option to tap liquidity is useful as it comes at a time when deposit rates continue to be sticky despite the 25 basis points repo rate cut from 6.50 per cent to 6.25 per cent at the last monetary policy review.
SCBs’ credit growth at 12.5 per cent exceeded deposit growth of 10.6 per cent as on January 24, 2025, per RBI data.
LCR Norms
Liquidity Coverage Ratio (LCR) increases Banks’ ability to absorb shocks arising from financial and economic stress. Under this framework they need to have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario.
Banks are required to maintain minimum LCR of 100 per cent from January 1, 2019. Under the proposed revision in LCR norms, Banks have to assign a higher run-off factor for retail deposits which are enabled with internet and mobile banking facilities (IMB). Unsecured wholesale funding provided by non-financial small business customers will also be treated similarly.
The aforementioned norms, if implemented from April 1, 2025, would have increased the demand for G-Secs. So, credit growth would have been impacted. Hence, RBI deferred implementation of the revised LCR by a year, taking into account to the gap between deposit and credit growth.
