A sustained preference for higher-yielding government securities could, at the margin, influence the allocation of greater bank resources towards statutory liquidity ratio-eligible investments, which could constrict credit flow to the private sector
Growing bank exposure to State Government Securities (SGS) could strengthen linkages between State finances and bank balance sheets, warranting close monitoring of fiscal risks at the sub-national level, cautioned the Financial Stability Report.In addition, a sustained preference for higher-yielding government securities could, at the margin, influence the allocation of greater bank resources towards statutory liquidity ratio-eligible investments, which could constrict credit flow to the private sector.SLR requires banks to invest 18 per cent of their deposits in Central government securities and State government securities. The report noted that besides evolving macroeconomic dynamics and external factors, demand-supply dynamics are playing an important role in shaping central government security (G-Sec) yields.“The sharp rise in State Government Securities (SGS) issuances in recent years, coupled with their relatively higher yields, has led banks to increase their holdings of these securities.“At the same time, long-term institutional investors such as insurers and pension funds have gradually diversified a larger share of their portfolios towards equities. These developments have financial stability implications,” said the report.The share of commercial bank holding in government bonds as a per cent of total outstanding loans was 36.1 per cent in the case of SGS and 33 per cent in the case of G-Secs, per RBI data.Published on June 30, 2026
