The Reserve Bank of India on Thursday allowed banks to dip further into statutory liquidity ratio reserves in a bid to provide more liquidity in the financial markets hit by the IL&FS group defaults. The central bank, while stating that there is surplus liquidity in the system, said it will ensure durable liquidity by using various available instruments depending on market conditions.
The RBI said banks can ‘carve out’ up to 15 per cent of holdings under the SLR reserves to meet their liquidity coverage ratio (LCR) requirements as compared to 13 per cent now. They can avail of higher liquidity with effect from October 1 as it has enhanced the “Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR)” from the existing 11 per cent to 13 per cent of their deposits, it said. This move will take the total carve-out from SLR available to banks to 15 per cent of their deposits. Banks’ SLR, which is the percentage of deposits that they have to mandatorily invest in government and state government securities, is currently at 19.5 per cent.
The RBI move follows concerns over tight liquidity conditions and banks’ unwillingness to lend to NBFCs. Concerns of liquidity crunch were triggered following defaults by the IL&FS group which spread to non-banking financial companies, roiling the financial markets. IL&FS Financial Services, a group company of IL&FS, defaulted on one of its commercial paper issuances due for repayment on Monday, the third default by the company
The RBI said it “stands ready to meet the durable liquidity requirements of the system through various available instruments depending on its dynamic assessment of the evolving liquidity and market conditions.”
The central bank said it conducted open market operation on September 19 and provided a liberal infusion of liquidity through term repos in addition to the usual provision via the liquidity adjustment facility . As of September 26, banks had availed of Rs 188,000 crore through term repos from the Reserve Bank, the apex bank said in a statement. “As a result of these steps, the system liquidity is in ample surplus,” it said.
The RBI further announced the relaxation in statutory liquidity ratio requirement with effect from October 1, 2018. “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,” it said.
According to a Kotak Securities report, while the recent event-based squeeze in money market liquidity has been in focus, overall liquidity was due to remain tight in FY2019, especially given the forex reserves depletion. “We expect the RBI to do OMO purchase of around Rs 1.5-2.0 lakh crore to alleviate the stress. However, it is unlikely to completely offset the liquidity tightness implying that the short-term rates would still likely remain elevated,” it said.
The recent squeeze in money market liquidity has mostly been on the back of portfolio adjustments in debt funds, which had a relatively larger exposure to specific entities. “While, as of now, we assign a low probability to a full-fledged liquidity crisis, the pressure in the NBFC debt space may continue for some time with the consequent hardening of short-term rates. However, as short-term rates harden, the funding cost of most NBFCs (and companies) will increase in the near term,” Kotak said.
The borrowing costs in general have been adverse over the past few quarters as the debt markets have been pricing in the concerns on systemic liquidity, fiscal slippages and policy rate hikes by the RBI.
Commercial banks led State Bank of India, with an exposure of over Rs 473,500 crore to the non-banking financial companies, have assured liquidity support to the NBFC segment following intense speculation that the NBFC sector was facing a debt crisis.
