There is more to the idea of allowing banks to raise long-term funds from the market for infrastructure projects than what meets the eye. The Budget has allowed banks to mobilize long-term funds without making provisions of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR), both of which are managed by the Reserve Bank of India (RBI).
FULL COVERAGE:Union Budget It will allow banks to mobilise longer term funds from the market apart from raising current and savings account (CASA) deposits.
The exemption from SLR and CRR will reduce the cost of funds of the banks. Today the banks end up deploying a major part of CASA deposits as SLR and CRR, which gives very low returns. The remaining funds are deployed at higher interest rate to compensate the loss incurred by putting aside for SLR and CRR. But there is more to it. What the SLR actually does is to direct the banks to earmark a part of their lendable resource in safe assets like government securities (G-Sec).
BUDGET SPEECH:Full text | Video So if a bank faces default from its borrowers, the money kept in SLR is secured. The objective of SLR is twofold: keep the bank safe and also create a ready market for G-Sec as banks to have to buy it compulsorily. This is also one of reasons why Indian banks came out unscathed from the global financial meltdown in 2008. So are we risking our banking system by allowing banks to raise long-term resource for infrastructure by bypassing SLR requirements.
The lax credit appraisal system in the public sector banks that control two-third of the banking is already showing up by way of non-performing assets. Loans to infrastructure projects have been the worst hit since the economic slowdown. The banks have not only restructured many of these loans but are also sitting over large NPAs in this segment. The exemption from CRR will also affect the monetary policy. CRR is used as a tool to control the amount of money in the system. Like SLR, CRR, now at 4 per cent of the bank deposits, directs banks to park a certain part of its deposits with the RBI. Now with the exemption to this rule, the RBI won't be in a position to play around with these funds.
Last but not the least, the cost of funds (despite SLR and CRR exemption) will not be much. First, the banks have to raise these deposits as long-term bonds where the interest rate expectations of investors would be high. The funds so raised would also go in the larger pool of funds that bank mobilises through all other sources. Take for example, the banks today despite raising low cost funds at 5-6 per cent have a minimum lending rate of around 10-12 per cent.