What is Statutory Liquidity Ratio (SLR)?

SLR : Features & Importance

Introduction

Statutory liquidity ratio (SLR) is the ratio of liquid assets to net demand and time liabilities (NDTL). Lets see the features and importance of SLR in this article.

What is Statutory Liquidity Ratio (SLR)?

• Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and government approved securities. The ratio of thes liquid assets to net demand and time liabilities (NDTL) is called as Statutory Liquidity Ratio(SLR).
• SLR is that portion of deposits which banks have to hold with themselves in highly liquid government securities.
• Statutory liquidity ratio (SLR) is the term for mandatory reserve requirement that the commercial banks in India require to maintain in the form of cash, government approved securities before providing credit to the customers. Statutory Liquidity Ratio is determined by Reserve Bank of India in order to control the expansion of bank credit.

India’s Statutory Liquidity Ratio

• India’s Statutory Liquidity Ratio data was reported at 19% in 15th May 2019. This stayed constant from the previous number of 19% for 14th May 2019. India’s Statutory Liquidity Ratio data is updated daily, averaging 25% from Mar 1949 to 15 May 2019, with 25628 observations.
• The data reached an all-time high of 38.5% in 8th Jan 1993 and a record low of 19% in 15 May 2019. India’s Statutory Liquidity Ratio is reported by Reserve Bank of India.
• Present direction of SLR reform is to gradually reduce it so that banks can give higher level of loans to the private sector.

COMPONENTS UNDER SLR

1. ASSETS ELIGIBLE UNDER SLR

• The eligible assets for SLR mainly include cash, gold and approved securities by the RBI. Most banks keep the SLR in the form of government approved securities specifically – central government bonds and treasury bills as they give a reasonable return.
• As per December 10, 2015 notification by the RBI, for Scheduled Commercial Banks, the SLR should be in the form of:

a) in cash, or

b) in gold valued at a price not exceeding the current market price, or

c) Unencumbered investment in any of the following instruments, namely:-

1. Dated securities of the Government of India or
2. Treasury Bills of the Government of India; or
3. State Development Loans (SDLs) of the State Governments

d) The deposit and unencumbered approved securities required to be made with the Reserve Bank by a banking company incorporated outside India;

e) Any balance maintained by a scheduled bank with the Reserve Bank in excess of the balance required to be maintained by it under section 42 of the Reserve Bank of India Act.

2. NET DEMAND & TIME LIABILITIES (NDTL)

• NDTL refers to the total demand and time liabilities (deposits) that is held by the banks of public and with other banks. Demand deposits consist of all liabilities which the bank needs to pay on demand. They include current deposits, demand drafts, balances in overdue fixed deposits and demand liabilities portion of savings bank deposits.
• Time deposits consist of deposits that need to repay on maturity, where the depositor can’t withdraw money immediately. Instead, he must wait until the lock-in tenure is over to access the funds. Fixed deposits, time liabilities portion of savings bank deposits and staff security deposits are some examples. The liabilities of a bank include call money market borrowings, certificate of deposits and investment deposits in other banks.

Which Institutions ARe Required to Keep SLR?

• SLR is an important regulatory requirement for the Scheduled Commercial Banks (SCBs) as they are the most dominant players in the financial system.
• But certain other institutions are also required to keep the SLR. The institutions which are required to keep SLR are: All Commercial Banks (Scheduled and non scheduled), Primary (Urban) Co-operative Banks (UCBs), State and Central Cooperative Banks.

Objectives of SLR

1. To Tighten up the Commercial Banks from Over Liquidating :

This can happen in the absence of SLR, when the Cash Reserve Ratio goes up and the bank is in dire need of funds. RBI employs SLR regulation to have control over the bank credit. It helps to ensure that there is solvency in commercial banks and assures that banks invest in government securities.

2. To Increase or Decrease the Bank’s Credit Flow :

The Reserve Bank of India raises SLR to control the bank credit during the time of inflation. Similarly, it decreases the SLR during the time of recession to increase the bank credit.

What Is the Purpose and Usage of SLR?

• The statutory liquidity ratio is determined and maintained by the central bank to control the bank credit, ensure the solvency of commercial banks and compel banks to invest in the government securities. By changing the SLR, the flow of bank credit in the economy can be increased or decreased. Such as, when the central bank decides to curb the bank credit so as to control the inflation will raise the SLR. On the contrary, when the economy faces recession, and the central bank decides to increase the bank credit will cut down the SLR.
• SLR is a monetary policy instrument (a direct instrument) theoretically. But at the practical level, SLR has helped the government to sell its securities or debt instruments to banks. During the pre-reform period the SLR was 38.5%. Here, banks have to spend 38.5% of their deposits to purchase government securities.
• There are couple of points that makes the SLR important for the government to make its debt management programme successful though the SLR is a monetary policy instrument at the table of the RBI.

• Most of the banks will be keeping their SLR in the form of government securities as it will earn them an interest income. The average interest rate (yield) for a ten year old government bond in India is around 7.39% currently.
• As the SLR is a statutory requirement and banks prefer to keep their SLR in the form of income earning securities, government can easily sell its bonds to the banks. This means SLR has facilitated government’s debt management programme.
• Securities above the SLR limit will be eligible from accommodation (temporary loan) under RBI’s repo. Understandably, all banks will be keeping government securities above the SLR level so that it can avail immediate money from the RBI by submitting it under the Repo. Usually, commercial banks in India hold around 25 to 30% of their NDTL in the form of government securities.
• Present direction of SLR reform is to gradually reduce it so that banks can give higher level of loans to the private sector.

How Is An Investor Affected by SLR?

• The Statutory Liquidity Ratio acts as one of the reference rates when RBI has to determine the base rate. Base rate is nothing but the minimum lending rate. No bank can lend funds below this rate. This rate is fixed to ensure transparency with respect to borrowing and lending in the credit market. The Base Rate also helps the banks to cut down on their cost of lending so as to be able to extend affordable loans.
• When RBI imposes a reserve requirement, it ensures that a certain portion of the deposits are safe and are always available for customers to redeem.  However, this condition also restricts the bank’s lending capacity. To keep this demand in control, there needs to be an increase in lending rates.

Penalties

• A penalty at a rate of 3% per annum above the bank rate is imposed if any commercial bank fails to maintain the statutory liquidity ratio.
• Further, a penalty at a rate of 5% per annum above the bank rate is imposed on a defaulter bank if it continues todefault on the next working day.
• Bank rate is one more rate notified by RBI in their quarterly review. Main purpose of this bank rate is majorly to determine penalty only.
• The central bank imposes such a restriction on the commercial banks so that the funds are readily made available to the customers on their demand.