With Left stalling Bill, law being changed to give RBI more room

With Left opposition stalling the Banking Regulation Amendment Bill 2005, the Union Cabinet today moved to free up banks8217; resources...

With Left opposition stalling the Banking Regulation Amendment Bill 2005, the Union Cabinet today moved to free up banks8217; resources to lend to the economy by deciding to take out one key section from the Bill and amend it through an ordinance. The ordinance will lead to a change in Section 24 of the Banking Regulation Act 1949, that sets a floor of 25 per cent for the Statutory Liquidity Ratio SLR to be maintained by banks.

In another key decision today, the Cabinet Committee on Prices decided to lift the ban on sugar exports, as proposed by the Ministry of Consumer Affairs, Food and Public Distribution. 8220;We now have the estimates for sugar production that have been firmed up. Taking into account the opening stock of sugar, the production numbers and the need to maintain a buffer stock, the position is now comfortable to allow exports,8221; Finance Minister P Chidambaram told reporters.

On the decision to change a section of the Banking Regulation Amendment Bill through an ordinance, Chidambaram said: 8220;The Bill had a provision to remove the floor of 25 per cent for SLR holdings, but it has been pending for quite some time. The Reserve Bank of India and the Government have had discussions and decided that this section has to be changed urgently. With this ordinance, the RBI can now go below that floor limit, if it so wishes8230; If the SLR will be lower, it will increase liquidity.8221;

Parliamentary Affairs and Information and Broadcasting Minister Priyaranjan Dasmunsi said, 8220;Talks with the Left parties continue so as to ensure the passage of the Amendment Bill, 2005, but this ordinance is being brought with a view to give the regulator operational flexibility to manage the liquidity in the system.8221;

As per SLR norms, banks are required to maintain part of their liabilities in liquid assets, mainly government securities.

Thus, this amounts to sort of enforced lending by banks to the government. With the growth in banks8217; loan portfolios outstripping the growth in their deposit base, several banks have been selling their SLR holdings in excess of the 25 per cent limit and are now close to the stipulated threshold.

While removing the floor limit of 25 per cent allows RBI to ensure that there are no credit constraints hampering the economy8217;s growth, it also reflects that the government is much more comfortable in managing its finances and doesn8217;t need to rely on mandated bank investments to meet its resource needs.

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At the same time, while the floor limit would cease to exist, the ceiling of 40 per cent SLR holdings has been retained.