Statutory liquidity ratio
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In
The SLR is commonly used to control
Usage
SLR is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved liability (deposits). It regulates the credit growth in India.
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. The maximum limit of SLR is 40% and minimum limit of SLR is 0 In India, Reserve Bank of India always determines the percentage of SLR.
There are some statutory requirements for temporarily placing the money in government bonds. Following this requirement, Reserve Bank of India fixes the level of SLR. However, as most banks currently keep an SLR higher than required (>26%) due to lack of credible lending options, near term reductions are unlikely to increase liquidity and are more symbolic.[2][3]
The SLR is fixed for a number of reasons. The chief driving force is increasing or decreasing liquidity which can result in a desired outcome. A few uses of mandating SLR are:
- Controlling the expansion of bank credit. By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.
- Ensuring the solvency of commercial banks
- By reducing the level of SLR, the RBI can increase liquidity with the commercial banks, resulting in increased investment. This is done to fuel growth and demand.
- Compelling the commercial banks to invest in government securities like government bonds
If any Indian bank fails to maintain the required level of the statutory liquidity ratio, it becomes liable to pay penalty to the Reserve Bank of India. The defaulter bank pays
The RBI can increase the SLR to control inflation, suck liquidity out of the market, to tighten the measure to safeguard the customers' money. Decrease in SLR rate is done to encourage growth. 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. However, in an emerging economy, interest rate change is a common activity.
Value and formula
The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the liabilities of the bank which are payable on demand anytime, and those liabilities which are accruing in one months time due to maturity) of a bank.
SLR rate = (liquid assets / (demand + time liabilities)) × 100%
This percentage is fixed by the Reserve Bank of India. The maximum limit for the SLR was 40% in India.[4] Following the amendment of the Banking regulation Act (1949) in January 2017, the floor rate of 20.75% for SLR was removed. From April 11, 2020, rate of SLR is 18.00%.
See also
- Bank rate
- Basel Accords
- Capital adequacy
- Cash reserve ratio
References
- ^ "Reserve Bank of India". www.rbi.org.com. Retrieved 4 June 2020.
- ^ "50 Basis Points Cut in SLR is Symbolic: Deven Choksey". NDTV. 3 February 2015. Retrieved 14 March 2019.
- ^ "RBI Pushes Banks for Lower Lending Rates". NDTV. 3 February 2015. Retrieved 14 March 2019.
- ^ Master Circular of RBI to banks http://rbidocs.rbi.org.in/rdocs/notification/PDFs/55663.pdf
Further reading
- SLR Historical Chart
- Tiwari, Mansi (16 November 2008), "Statutory Liquidity Ratio", The Economic Times.
- "RBI cuts statutory liquidity ratio by 50 bps to release Rs 39,000 crore of liquidity for banks", The Economic Times, 3 June 2014.
- "Latest RBI Master Circular on Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)", Reserve Bank of India, 1 July 2011.
- "RBI keeps key rates unchanged, SLR cut by 1%", The Economic Times, 31 July 2012.