The Reserve Bank of India is examining whether it should relieve banks of CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) obligations with regard to infrastructure funding. If the proposal goes through, it could come as a fillip to the soon-to-be-sworn-in Narendra Modi government’s big bang infrastructure plans.
The BJP manifesto promised 100 new cities and high-speed bullet trains. Heavy-duty infrastructure construction is widely expected to be crucial in the Modi government’s agenda for revival of the economy.
“Today, the investment needs of the economy, especially long-term investment in areas like infrastructure, have increased … To create space for financing, the government has to pre-empt less of the banking system’s assets,” Governor Raghuram Rajan said on Tuesday. Dr. Rajan was delivering a lecture on the Annual Day of the Competition Commission of India in Delhi.
The CRR and SLR obligations disadvantage banks vis-a-vis other financial institutions in the raising and lending of long-term money, which becomes especially important for infrastructure, Dr. Rajan said. Since construction lasts for 5-7 years, banks should be able to raise long-tenor money for these purposes, said Dr. Rajan. However, at present, the raising of such money by banks is burdened with CRR and SLR requirements. Thereafter, any lending that banks do attracts further priority-sector obligations. “To the extent that banks raise long-term bonds and use them for infrastructure financing, could we relieve them of such obligations?” said Dr. Rajan.
CRR is the minimum percentage of deposits a bank must hold as currency chests or deposit with the RBI. SLR is the minimum percentage of deposits a bank must maintain in the form of gold, cash or other approved securities. The RBI is empowered to increase SLR up to 40 percent. The CRR and SLR limit the amounts that banks can lend.
