Statutory liquidity ratio is a monetary policy tool that the Reserve Bank of India (RBI) uses to assess the liquidity at the banks’ disposal. SLR requires banks to keep a certain amount of their money invested in specific central and state government securities.
SLR refers to the percentage of the aggregate deposits that commercial banks have to invest in liquid assets. The RBI has specified such liquid assets which banks have to invest in to maintain their SLR.
As per RBI, liquid assets may be maintained –
(i) in cash, or
(ii) in gold valued at a price not exceeding the current market price, or
(iii) Unencumbered investment in approved securities
‘Approved securities’ means those securities that are issued by the Central Government or any State Government or other securities that are specified by the RBI from time to time. The RBI specifies the SLR status of securities issued by the Government of India and the State Governments.
Here are a few examples of approved SLR securities:
Statutory Liquidity Ratio is expressed in percentage terms. Currently, the statutory liquidity ratio rate is 18%. (As on August 27, 2020). RBI has kept 40% as the maximum limit for SLR. SLR is calculated as a percentage of all the deposits held by the bank. Another way to define the SLR meaning is the ratio of a bank’s liquid assets to its net demand and time liabilities. (NDTL).
NDTL, in banking parlance, is the aggregate of savings account, current account, and fixed deposit balances held by a bank. So banks have to keep 18% (or whatever the statutory liquidity ratio rate is) of their aggregate deposits with the RBI in the form of liquid securities.
As opposed to CRR, in the Statutory Liquidity Ratio, the bank does earn some interest from the government security they invest in.
All banks that are administered by the RBI have to maintain SLR and CRR.
While the main objective of monetary policy tools like CRR and SLR is to maintain liquidity, there are multiple objectives that these tools serve as well.
1) One of the main objectives is to prevent commercial banks from liquidating their liquid assets when the RBI raises the CRR.
2) SLR is used by the RBI to control credit flow in the banks.
3) In a way, SLR also makes commercial banks invest in government securities.
4) Making banks invest a portion of their deposits in government securities also ensures the solvency of such banks.
5) SLR might be a monetary policy tool, but it has also helped the government sell a lot of its securities. So SLR helps in the government’s debt management program and RBI’s monetary policy as well.
As the chief monetary authority of our economy, RBI is responsible for handling cash flows, inflation levels, and price levels in the country.
To carry out its functions efficiently, RBI has many tools at its disposal. These include; Repo rate, reverse repo rate, marginal standing facility, bank rate, open market operations, moral suasion, CRR, SLR, and a few others.
In many ways, SLR also helps RBI control inflation. Raising SLR makes banks park more money in government securities and reduce the level of cash in the economy. This helps raise price levels and inflation in the economy. Doing the opposite helps maintain cash flow in the economy. Reducing SLR leaves more liquidity with banks, which in turn can fuel growth and demand in the economy.
This is how changing the SLR ratio also helps RBI maintain bank credit flow.
According to Section 24 and Section 56 of the Banking Regulation Act 1949, all scheduled commercial banks, Primary (Urban) co-operative banks (UCBs), local area banks, state and central co-operative banks in India need to maintain the SLR. Following are the important components-
|1.||CRR requires banks to keep a certain amount of their aggregate deposits in cash with the RBI||SLR requires banks to keep a certain amount of their aggregate deposits in liquid assets.|
|2.||Banks do not earn any interest from the RBI in case of the cash parked with RBI under CRR requirements.||Banks earn interest. This is because, under SLR requirements, banks are supposed to invest in liquid assets like central and state government securities/bonds. These bonds earn banks some interest.|