Abolish Antiquated Statutory Liquidity Ratio for Banks to Prevent Complacency and Foster Growth
Sanjay Malhotra, as the current Governor of the Reserve Bank of India (RBI), has made notable strides in monetary policy. His decision to reduce the repo rate by 50 basis points in June was met with widespread approval and considered a bold move. However, there are calls for even more daring reforms, particularly the abolition of the Statutory Liquidity Ratio (SLR).
Abolishing the Statutory Liquidity Ratio (SLR)
The SLR mandates banks to maintain 18% of their assets in government bonds or gold. This requirement is seen as an obsolete measure that hinders economic progress. As India aims to become a ‘Viksit Bharat’ (Developed India), modernization of the monetary system is essential.
The Case for Reform
- SLR forces banks to focus on financing government debt rather than supporting businesses.
- This constraint limits capital flow to innovative sectors and infrastructure projects.
- Small and Medium Enterprises (SMEs), crucial for job creation, struggle to access affordable credit.
Currently, banks are burdened by mandatory investments in low-yielding securities, leading to lower interest rates for savers. This scenario is characterized as financial repression rather than prudent management, which stifles growth.
Rethinking Stability and Control
Supporters of the SLR argue that it provides stability. However, with modern standards such as Basel III in place, SLR appears redundant. The RBI already employs a suite of tools for effective liquidity management, making the SLR unnecessary.
- Open market operations
- Repo and reverse repo mechanisms
- Variable rate auctions
Abolishing the SLR would compel both the central and state governments to operate in a competitive borrowing market. This change would prevent disparities in borrowing costs among different states, ensuring fiscal responsibility.
Empowering Banks and Encouraging Growth
Critics often express concerns that removing the SLR could weaken monetary control. Nevertheless, this argument overlooks the current capabilities of the RBI. Today’s central banks are equipped to manage economic fluctuations without relying on outdated measures.
Banking institutions must evolve and learn to manage risks adeptly instead of relying on regulatory constraints. Abolishing SLR would enable banks to allocate resources more efficiently, contributing to innovation and industrial growth.
Conclusion
The continued existence of the SLR acts as an anchor, preventing banks from utilizing capital effectively for development. By abolishing this antiquated measure, the Indian banking sector can unlock its potential. This reform is crucial for fostering economic growth, bolstering credit markets, and moving India toward its ambitious goal of becoming a $10 trillion economy.
