SLR flexibility to be RBI's new tool
The Union Cabinet on January 11, 2007 approved the promulgation of an ordinance to amend the statutory liquidity ratio (SLR) for banks to ensure greater credit flow to the industry. To achieve this, the government intends to empower the Reserve Bank of India (RBI) to set lower SLR floors from the existing 25% on the net demand and time liabilities ie deposits.
The average yield on the advances for public sector undertaking (PSU) banks is above 9% after the prime lending rate (PLR) hike while the current yield on investments is in the range of 7.2-7.5%. For private banks the average yield on the advances is in the vicinity of 10% while the average yield on investments is below 7%. This provides a significant opportunity for the banks in the longer term to improve their earnings based on a small realignment of their balance sheet composition as we don't expect the RBI to cut the SLR at this point of time
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