SLR

Statutory liquidity ratio is the amount of liquid assets such as precious metals (gold) or other approved securities, that a financial institution must maintain as reserves other than the cash . The statutory liquidity ratio is a term most commonly used in India. The objectives of SLR are to restrict the expansion of bank credit. 1. To augment the investment of the banks in government securities. 2. To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India. 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 200506. 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 are 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 corporates 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 corporates.

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 central bank. The maximum and minimum limits for the SLR are 40% and 25% respectively in India.[1] Following the amendment of the Banking regulation Act(1949) in January 2007, the floor rate of 25% for SLR was removed. Presently, the SLR is 23%.

Difference between SLR and CRR

Both CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of banks that they can pump in economy SLR restricts the banks 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 to reduce liquidity in banking system. Thus CRR controls liquidity in banking system while SLR regulates credit growth in the country. 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 central bank, whereas SLR is money deposited in govt. securities. CRR is used to control inflation. CRR and SLR continue to be relevant to monetary policy practice in India even today.
October 25, 2012:

The pre-emption of bank funds in India have historically been exercised through three channels the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and directing credit to preferred sectors based on so-called priority sector norms. The above pre-emptions have different implications for banking operations. This article deals with the first two channels.
Changing role of CRR

The CRR is partly a prudential requirement for banks to maintain a minimum amount of cash reserves to meet their payments obligations in a fractional reserve system. The Reserve Bank of India (RBI) Act implicitly prescribed the CRR originally at a minimum of 3 per cent of any banks net demand and time liabilities. That restriction was removed by an amendment in 2006. While the RBI is now free to prescribe this rate, any CRR above 3 per cent can still be viewed as a monetary tool to contain expansion of money supply by influencing the money multiplier. But the way in which the CRR was operated historically made it serve a much wider role. During the 1990s, when there was influx of foreign funds through non-resident Indian (NRI) deposits, a differential CRR was prescribed on such deposits to restrict their inflows. This role CRR being used as an instrument of regulating NRI deposit flows got relegated to the background once the relative attraction of such deposits vis-a-vis rupee deposits was

removed. Now that the interest rates on NRI deposits have been freed, the above role of CRR could well be revived again. In the more recent period after 2004, when there was a huge influx of foreign capital through varied forms of debt and non-debt flows, and the RBI ended up accumulating large forex reserves, the CRR became an optional instrument to sterilise the rupee resources released from such dollar purchases. This was particularly enabled by not paying any interest on CRR balances maintained by banks with the RBI. The other options of sterilisation through open market operations and the repo operations through the liquidity adjustment window (LAF) cost the central bank, just as the market stabilisation scheme cost the Government fiscally in terms of interest payments. The official view on CRR has been changing. During the period of financial repression before 1990s, CRR was the most preferred monetary policy tool. But the Narasimham Committee of 1991 recommended gradual reduction in CRR and increased use of indirect market-based instruments. This was broadly accepted and the CRR reduced from more than 15 per cent to 4.5 per cent by 2003. But since 2004, the use of CRR as an instrument of sterilisation and also a monetary tool has gained ground again. At the same time, the ratio stands now at 4.5 per cent, the previous historic low. Under these circumstances, the official philosophy on CRR in the current juncture is not known. Since CRR acts as a tax that increases their transaction costs, banks in general would want its role to be restored to being a prudential minimum requirement of not more than 3 per cent. And since quantitative easing has become a fashion of central banking across the world, the RBI may well choose to bring the CRR further down gradually to about 3 per cent during the current easing phase, without losing sight of monetary control in the face of inflation remaining stubbornly high at around 8 per cent. Like CRR, SLR can also be viewed as a hybrid instrument of a different variety. The SLR, according to some, is not a monetary tool and is only a prudential requirement to serve as a cushion for safety of bank deposits. The minimum prescription in this manner was 25 per cent of banks demand and time liabilities. But it was also more a way of finding a captive market for government securities, particularly when they were bearing below market interest rates. Not surprisingly, this ratio touched about 38 per cent around 1991. K. KANAGASABAPATHY Share Comment print T+