1. How does Statutory Liquidity Ratio work?
In India, the RBI is responsible for regulating the supply of money and stability of prices in order to ensure a progressive economy. Its uses the monetary policy for achieving these objectives. Amongst other tools, SLR happens to be one of the important instruments of the monetary policy aimed at ensuring the solvency of the banks and money flow in the economy.
At the close of every business day, every bank is required to maintain a minimum portion of their Net Demand and Time Liabilities (NDTL) in the form of gold, cash, or any liquid asset form. The ratio of these liquid assets to the demand and time liabilities is referred to as the Statutory Liquidity Ratio. The Reserve Bank of India has the authority to increase this ratio up to 40%. The increase in this ratio constricts the ability of the bank to inject money into the economy.
2. What are the components of Statutory Liquidity Ratio?
All the commercial banks in India are required to maintain the Statutory Liquidity Ratio as per Section 24 and Section 56 of the Banking Regulation Act 1949. It becomes pertinent to know in detail about the components of the SLR as follows:
a. Liquid Assets
These are assets that can be easily converted into cash. These include gold and cash reserve, treasury bills, the government approved securities, government bonds. Additionally, it also consists of securities which are eligible under Market Stabilisation Schemes and those falling under the market borrowing programmes.
b. Net Demand and 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 like 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 and where the depositor can’t withdraw money immediately; instead, he is required to wait a certain time period to access the funds. It includes fixed deposits, time liabilities portion of savings bank deposits and staff security deposits. The liabilities of a bank include call money market borrowings, certificate of deposits and investment in deposits other banks.
c. SLR Limit
The SLR has an upper limit of 40% and a lower limit of 23%.
3. Objectives of Statutory Liquidity Ratio
a. The prime objective of Statutory Liquidity ratio is to curtail the commercial banks from liquidating their liquid assets when the Cash Reserve Ratio is raised. This ratio is determined and used by the Reserve Bank of India 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.
b. The flow of bank credit can be increased or decreased in the economy by means of altering the Statutory Liquidity Ratio. The Reserve Bank of India raises the SLR to control the bank credit during the time of inflation and inversely it decreases the SLR during the time of recession to increase the bank credit.
4. Difference between SLR & CRR
Both SLR and CRR are the components of the monetary policy. However, there are a few differences between them. The following table gives a glimpse into the dissimilarities:
|Statutory Liquidity Ratio (SLR)||Cash Reserve Ratio (CRR)|
|In case of SLR, banks are asked to have reserves of liquid assets which include both cash and gold.||The CRR requires banks to have only cash reserves with the RBI|
|Banks earn returns on money parked as SLR||Banks don't earn returns on money parked as CRR|
|SLR is used to control the bank's leverage for credit expansion.||The Central Bank controls the liquidity in the Banking system with CRR.|
|In case of SLR, the securities are kept with the banks themselves which they need to maintain in the form of liquid assets.||In CRR, the cash reserve is maintained by the banks with the Reserve Bank of India.|
5. Impact of Statutory Liquidity Ratio on the Investor
In order to determine the base rate, the Statutory Liquidity Ratio acts as one of the reference rates. Base rate means the minimum lending rate which is determined by the Reserve Bank of India (RBI) and no bank is allowed to 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 a reserve requirement is imposed on banks, it ensures that a certain portion of the deposits are safe and are always available to be redeemed by the customers. But this condition also restricts the banks capacity for lending. In order to keep the demand in control, the lending rates have to be increased.
6. What happens if SLR is not maintained?
In India, every bank including scheduled commercial bank, state cooperative bank, central cooperative banks, and primary co-operative banks shall maintain the statutory liquidity ratio according to RBI’s mandate. For computation and maintenance of SLR, the net demand and time liabilities are calculated and reported every fortnight Friday by banks.
If any commercial bank fails to maintain the required Statutory Liquidity Ratio, they are fined a penalty of 3% per annum over the bank rate. If the bank continues to default on the following working day as well, then they are penalized 5% per annum over the bank rate. The Reserve Bank of India does this to make sure that commercial banks do not fail to have ready cash available when customers demand them.
7. Current Repo Rate and its impact
Apart from SLR, there are others metrics used by RBI to regulate the economy. RBI keeps changing the repo rate and reverse repo rate according to changing macroeconomic factors. Whenever RBI modifies the rates, it impacts every sector of the economy; although in different ways. Some segments gain as a result of the rate hike while others may suffer losses. Looking at the built up of inflationary pressures, RBI recently hiked the repo rate by 25 basis points to 6.25% and the reverse repo rate to 6%.
In some instances, big loans like home loans might be impacted due to a change in the reverse repo rates. If the RBI cuts the repo rate, it need not necessarily mean that the home loan EMIs would get lesser or the interest rates would get reduced as well. The lending bank also needs to reduce its ‘Base Lending’ rate for the EMIs to decrease. Home loan rates or fixed rate consumer loans aren’t impacted by RBI’s rate cut. The rate of interest is fixed with respect to fixed loans.