SLR (Statutory Liquidity Ratio) : A summery

SLR (Statutory Liquidity Ratio):

It refers to the amount that the commercial banks require to maintain in the form of cash, or gold or govt. approved securities before providing credit to the customers. Here by approved securities we mean, bond and shares of different companies. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India.

The main objectives for maintaining the Statutory Liquidity Ratio are the following:

1.       Statutory Liquidity Ratio is maintained in order to control the expansion of Bank Credit. By changing the level of Statutory Liquidity Ratio, Reserve bank of India can increase or decrease bank credit expansion.

2. Statutory Liquidity Ratio in a way ensures the solvency of commercial banks.
3. By determining Statutory Liquidity Ratio, Reserve Bank of India, in a way, compels the commercial banks to invest in government securities like government bonds.

However the one theme behind SLR is to force banks in investing less returning securities of government.  In a growing economy banks would like to invest in stock market, not in Government Securities or Gold as the latter would yield less returns. One more reason is long term Government Securities (or any bond) are sensitive to interest rate changes and in an emerging economy interest rate change is a common activity. 

The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing or increasing the money supply in the system respectively. Indian banks’ holdings of government securities (Government securities) are now close to the statutory minimum that banks are required to hold to comply with existing regulation. When measured in rupees, such holdings decreased for the first time in a little less than 40 years (since the nationalisation of banks in 1969) in 2005-06.

Determination

It is determined as percentage of total demand and percentage of time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers on their anytime demand. The liabilities that the banks are liable to pay within one month's time, due to completion of maturity period, are also considered as time liabilities.

Thus SLR Rate = Total Demand/Time Liabilities x 100%

The maximum limit of SLR is 40% and minimum limit of SLR is 24%.  The RBI as per need can ask banks to maintain SLR between these two. At pres the SLR rate of INDIA is 24%.

SLR and G-Sec(Government security)

While the recent credit boom is a key driver of the decline in banks’ portfolios of G-Sec, other factors have played an important role recently.

These include:

1.     Interest rate increases.

2.     Changes in the prudential regulation of banks’ investments in G-Sec.

Most G-Sec held by banks is long-term fixed-rate bonds, which are sensitive to changes in interest rates. Increasing interest rates have eroded banks’ income from trading in G-Sec.

Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around 108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. This was to increase lending by the banks to the corporate and resolve liquidity crisis; providing economy with the much needed fuel of liquidity to maintain the pace of growth rate. However the exercise became futile with banks being over cautious of lending in highly shaky market conditions. Banks invested almost 70% of this money to rather safe Govt securities than lending it to corporate.

Difference between SLR & CRR

SLR restricts the bank’s leverage in pumping more money into the economy. On the other hand, CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the Central Bank.

The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, whereas SLR is maintained in liquid form with banks themselves.

SLR and News

In November,2008 when RBI reduced the SLR rate by 1% to 24% then economic times reported “A cut in SLR means that the home, car and commercial loan rates will go down. It also means that banks will now have the option of selling Rs 40,000 crore of government securities that until now formed part of their statutory investments. It was increased to 25% in 2009 and then was again reduced to 24%.