Deepak Parekh bats for SLR cut to free up more funds to lend

Former HDFC Ltd chairman Deepak Parekh.

Former chairman of HDFC Ltd and veteran banker Deepak Parekh has said that the Reserve Bank of India (RBI) should cut Statutory Liquidity Ratio (SLR) to free up capital for banks to lend to help build the economy especially  at a time when deposits were not growing fast enough.

“Banks have to lend for the economy to grow and to build the economy. I think it's a right time now for the to gradually bring down the SLR also and give more money to the banks because overnight deposits are not going to increase,” Parekh said during the 10th episode of the podcast Unscripted with Chanda Kochhar.

SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of cash, gold, or other securities. It is the reserve requirement that banks are expected to keep before offering credit to customers. Currently, banks have to maintain 18 percent SLR of total deposits.

Parekh’s SLR cut demand has come after the Reserve Bank of India (RBI) early this month cut the cash reserve ratio (CRR) by 100 basis points (bps) to add liquidity to the banking system. The CRR cut is scheduled in four tranches of 25 bps each starting from the fortnight beginning September 6, October 4, November 1 and November 29.

The CRR cut, between September and November, is timed to coincide with the festival season, when Indians shop for big ticket items like cars and even houses, due to which currency leakage from banks increases, putting pressure on systemic liquidity.

Giving durable liquidity support of Rs 2.5 lakh crore during the season will improve the banks’ sentiments as it ease liquidity pressure during the time when credit growth picks up significantly.

Parekh also batted for SLR cut because the deposit accretion is not happening at a faster pace and money is moving to the other financial instruments such as mutual funds and the stock market.

Stress over CASA ratio has increased after the central bank started the rate-cutting cycle, leading to banks adjusting rates on these deposits. So far this year, the RBI has cumulatively cut rates by 100 bps.

As stress persists for banks on the deposit mobilisation front, a few banks have been tapping the short-term debt market to raise funds through certificates of deposits (CDs).

According to the RBI’s annual report, CD issuances increased as banks supplemented their deposit resources. In the primary market, fresh issuance of CDs increased to Rs 2.8 lakh crore in Q2 of FY25,  from Rs 2.5 lakh crore in Q1, and to Rs 2.9 lakh crore in Q3  as credit growth remained higher than deposit growth. It stood at Rs 3.7 lakh crore in Q4.