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The real reason behind Reserve Bank of India's SLR cut

The real reason behind Reserve Bank of India's SLR cut

The cut could actually be a part of RBI Governor Raghuram Rajan's scheme of things given his clear stance on the necessity for bankers to move away from lazy banking.

(Photo: Reuters) (Photo: Reuters)

Call it coincidence or a logical step forward. A day after the deadline for payment banks ended Monday, Reserve Bank of India (RBI) Governor Raghuram Rajan surprised the markets with a 50 basis points cut in the statutory liquidity ratio (SLR) from 22 per cent to 21.50 per cent.

SLR is the ratio of liquid assets that all banks must maintain to invest in safe-haven assets such as government securities. The licences under the differentiated banking licensing regime were Rajan's brainchild to achieve twin objectives - financial inclusion and a ready market, or institutional support, for government securities. This is being looked at as a long-term plan and the impact of payment banks are expected to be visible five to 10 years from now if the business model succeeds.

The list of payment bank applicants, including the likes of Mukesh Ambani's Reliance Industries and Kumar Mangalam Birla's Aditya Birla Group, had already created a flutter in the market as the deadline ended. And the cut in SLR on Tuesday by the RBI could have been a mere coincidence.

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However, it could actually be a part of Rajan's scheme of things given his clear stance on the necessity for bankers to move away from lazy banking from the day he took over as the RBI Governor in September 2013. While admitting that this could not have been achieved overnight, Rajan had said that as government finances improve, the scope of such reductions will increase. "As the penetration of other financial institutions, such as pension funds and insurance companies increase, we can reduce the need for regular commercial banks to invest in government securities," the RBI Governor had said.

The celebrated economist has actually set in motion an altogether new institutional framework that might eventually do away with SLR. This could take between five and 10 years.

A higher SLR requirement, which has been an Indian concept, has been responsible for restricting fund flows into sectors that are heavily dependent on bank funds. However, bankers were happy to park funds in SLR and earn risk-free returns. In fact, some of the PSU banks have been keeping a much higher limit in SLR than mandated by the RBI.

Rajan's current move is also a signal that the banking system will not be available for absorbing high government borrowings.