Statutory Liquidity Ratio (SLR) Recently RBI reduced SLR from 22%-21.5% (i.e., w.e.f.7.2.2015). SLR is a type of financial calculation that involves determining the total amount of liquid assists that an institution must hold in reserve in order to operate in compliance with banking regulations set in place by a RBI. The types of assets involved in this reserve may be cash, precious metals, or other types of approved securities that are found on listings provided by the appropriate regulatory agency. Cash that is required for operation by a central bank of a country is usually not included among the liquid assets that constitute the SLR.
While there are some variations on the formula for determining the SLR, just about any approach will involve identifying some percentage of the total demand and time liabilities to the bank operation. Liabilities are simply the liabilities of the institution that are payable on demand at any given time, along with any liabilities that are accruing in a month's time period due to maturity of those liabilities. The sum total of the demand and the time liabilities are multiplied by an identified percentage, providing the SLR and defining the amount of assets that must be kept on hand.
Reserve Bank can increase the SLR to contain inflation, suck inflation in the market, to tighten the measure to safeguard the customers' money. In a growing economy, banks would like to invest in stock market, not in Govt. Securities to Gold as the latter would yield less returns. One more reason is long term Govt. Securities (or any bond) are sensitive to interest rate changes. But in an emerging economy, interest rate change is a common activity.
By approved securities we mean bonds and shares of different companies. SLR is determined and maintained by RBI.
Objectives for maintaining SLR:
When the economy is faced with recession or inflation, SLR percentages are reduced or increased by RBI in order to increase or decrease the credit in the country and cure the situation through various instruments of monetary policy and one of which is SLR.
At the time of recession :-RBI reduces the SLR to increase credit availability, so that investments increase and further increases the aggregated demand which ultimately leads to increase in prices.
At the time of Inflation :-RBI increases SLR to decrease credit availability, so that investments decrease and further decrease the aggregate demand which ultimately leads to decrease in prices.
Recent DevelopmentsConsequent upon amendment to the Section 24 of the Banking Regulation Act, 1949 through the Banking Act, 2007 replacing the regulation Ordinance, 2007, effective January 23, 2007, the Reserve Bank can prescribe the SLR for SCBs in specified assets. The value of such assets of scheduled commercial banks shall not be less than such percentage not exceeding 40% of its total demand and time liabilities.
Scheduled Commercial Banks can participate in the Marginal Standing Facility (MSF) scheme introduced by Reserve Bank with effect from May 09, 2011. Under this facility, the eligible entities may borrow up to two percent of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight from April 17, 2012. Additionally, the eligible entities may also continue to access overnight funds under this facility against their excess SLR holdings. In the event, the banks' SLR holding falls below the Statutory requirement up to 2% of their NDTL, banks will not have the obligation to seek a specific waiver for default in SLR compliance arising out of use this facility in terms of notification issued under the sub section (2A) of section 24 of the Banking Regulation Act, 1949.
Statutory Liquidity Ratio Securities.
Provided that the securities (including margin) referred to above, of acquired under the Reserve Bank – Liquidity Adjustment Facility (LAF), shall not be treated as an eligible asset for the purpose.
Procedure for Computation of SLRThe procedure to compute total NDTL for the purpose of SLR under Section 24(2) (B) of Banking Regulation Act, 1949 is broadly similar to the procedure followed for CRR. Similarly, banks should include their interbank's assets of term deposits and term lending of all maturities is 'Assets with the Banking System' for computation of NDTL for SLR purpose.
Every Bank in India has to maintain at the close of business every day, a minimum proportion of their net demand and time liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ration of liquid assets to demand and time liabilities is known as SLR.
In simple words, it is the percentage of total deposits banks have to invest in Govt. bonds and other approved securities. A SLR bond also qualifies for the portfolio maintained by banks to meet the liquidity requirement.
RBI in November, 2014 cut the SLR for banks by one percentage point and it now stands at 21.5% (i.e. 7.2.2015).
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. 42,000 core of Govt. securities that until now formed part of their statutory investments. The RBI is empowered to increase in SLR also restrict the bank's leverage position to pump more money into the economy.
SLR or statutory liquidity ratio is a tool as well as safety valve for banks and thus to the public.
When a bank lends all the money it has got as deposits, the bank has every chance to face liquidity crunch and ultimate crash. This has happened in earlier times. So the regulator has put certain statutory conditions to keep the liquidity needs of the banks safe and smooth. It has prescribed that a certain percentage of the bank's total liabilities be kept as reserve in liquid assets. The bank thus cannot lend all the money it gets as deposits.
To encourage banks to recover its credit, the SLR requirement is not on the loan recovery amount. So a bank which can get good recovery can lend more and make better turnover. To have good profits banks need to turnover their loans by faster and better recovery, rather than depending on costly deposits.
As the regulator can tweak on the SLR percentage, it can control the money supply in the country by changing the amount of lend-able resources with the banks.
With this background in mind reading the above article will be more beneficial in understanding the subject. The same can affect the interest rates also.