Good news for banks from RBI; This is how it helps your loan EMIs

To boost liquidity situation in banks, the Reserve Bank of India (RBI) has reduced the carve-out from Statutory Liquidity Ratio (SLR) starting from October month. RBI has now permitted banks to reckon Government securities held by them up to another 2% of their NDTL, under FALLCR within the mandatory SLR requirement, as Level 1 HQLA for the purpose of computing their LCR. This means, carve-out from SLR, under FALLCR will now be 13%, taking the total carve out from SLR available to banks to 15% of their NDTL. 

RBI in a statement said, “This should supplement the ability of individual banks to avail of liquidity, if required, from the repo markets against high quality collateral. This in turn will help improve the distribution of liquidity in the financial system as a whole.”

As of September 26, banks had availed of Rs 1.88 trillion through term repos from the Reserve Bank. As a result of these steps, the system liquidity is in ample surplus.

RBI said, “Going forward, the Reserve Bank stands ready to meet the durable liquidity requirements of the system through various available instruments depending on its dynamic assessment of the evolving liquidity and market conditions.”

Apart from Cash Reserve Ratio (CRR), banks are needed to hold a certain percentage of NDTL in forms of securities like government bonds, gold, cash, etc.

This certain portion is called as SLR – which is done to ensure banks have enough of funds available to pay back to its customers who may have any immediate requirement to encash their deposits. 

Banks are needed to maintain a maximum SLR limit of 40%. Currently, the SLR floor is at 19.5%. 

In case of lower SLR, banks have higher ability to give credit which means further room for a cut in marginal cost fund based of lending rates (MCLR) making people to opt for more loans for various purpose. 

According to ClearTax, the objective of SLR is to decide the flow of credit, whether it can be increased or decreased. 

It explains, that RBI  raises the SLR to control the bank credit during the time of inflation and inversely it decreases the SLR during the time of recession to increase it.

Hence, banks will now be encouraged to reduce their lending rates, and in return your EMIs too.