Banks scale up investments in SLR securities in Q1FY24 as deposit base jumps

SLR is one of the obligatory reserves banks have to maintain in the form of approved securities as per a specific percentage of net demand and time liability (NDTL)

Banks have increased their investments in Statutory Liquidity Ratio (SLR) securities by 4.7 percent in Q1FY24 as deposits grew by around 7 percent in the same period compared to March 24, 2023.

However, they have reduced their investments in non-SLR securities by around 1 percent in the April-June quarter. Investments in non-SLR stood at Rs 1.81 lakh crore as on June 30, 2023, as against Rs 1.82 lakh crore, as on March 24, 2023, the RBI’s August Bulletin showed.

What is SLR?

SLR is one of the obligatory reserves banks have to maintain in the form of approved securities as per a specific percentage of net demand and time liability (NDTL).

Under SLR requirements, banks can invest and maintain central government-dated securities, treasury bills, state development loans and other securities approved by the central bank.

According to RBI norms, banks have to maintain 23 percent of NDTL in the form of SLR securities.

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Why did banks raise SLR investments?

According to the Reserve Bank of India’s (RBI) August 2023 Bulletin, investments in SLR securities by scheduled commercial banks (SCB) stood at Rs 56.71 lakh crore, as on June 30, compared to Rs 54.15 lakh crore, as on March 24.

“An increase in deposits warrants higher SLR requirements by banks. Also, rates were attractive during that period,” said Arun Bansal, Head of Treasury, IDBI Bank.

According to Mataprasad Pandey, Vice President of Arete Capital Service, banks will also be interested in having exposure to government securities at these levels as they benefit from higher yield to maturity, especially under the held-to-maturity (HTM) category.

In April 2022, the RBI enhanced the existing HTM limit of 22 percent to 23 percent and allowed banks to include securities acquired between April 1, 2022 and March 31, 2023, under the enhanced limit of 23 percent.

The enhanced HTM limit of 23 percent shall be restored to 19.5 percent in a phased manner, beginning from the quarter ending June 30, 2023, the RBI said in a release.

The investment by banks in SLR securities increased by over 16 percent on a YoY basis, as on June 30, 2023, according to the RBI’s August Bulletin.

However, they have reduced their investment in non-SLR securities by around 1 percent in the April-June quarter. As per data, investment in non-SLR stood at Rs 1.81 lakh crore as on June 30, 2023, as against Rs 1.82 lakh crore, as on March 24, 2023.

Similarly, investment in commercial papers fell by around 8 percent to Rs 59,999 crore, as on June 30, from Rs 65,058 crore, as on March 24, 2023.

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Is the investment attractive for banks?

Money market dealers said that, for banks, investments became attractive because the yield on government securities was trading higher before the rate hike pause by the RBI.

The yield on the 10-year benchmark bond was at 7.31 percent on April 3, which fell to 6.98 percent in early June, before slightly going up. Currently, the 10-year yield is trading at around 7.2015 percent.

Whenever the yield on bonds rises, prices fall in the secondary market, which makes investments attractive in that securities because, during reversal, investors can enjoy capital appreciation.

Similarly, banks have also used that opportunity by taking exposure at that level, which may help them to enjoy a good amount of capital appreciation during reversal, Pandey said.

Bond yields and prices are inversely proportional and move in opposite directions.

The central bank, since its April policy, has kept the repo rate unchanged, which helped bond yields to ease more than 20 basis points (bps) that led to some capital appreciation on the investment of banks, dealers said.

One basis point is one-hundredth of a percentage point. But after the July inflation, yields have again started moving upward.