At an aggregate level, the SLR holdings of banks are close to 39 per cent as compared to the regulatory prescription of 25 per cent. Even strong commercial banks seem to be voluntarily adopting ‘narrow banking’ in a bid to minimize credit risk while increasing profitability.
Such large investments in government securities well beyond the statutory requirement reflect dissipation of banking knowledge capital with regard to credit appraisals. The interest rate risk on investments in gilts need hardly be over emphasised. Further, the current focus of banks is bound to exact some heavy costs in terms of efficiency and credit availability.