- Statutory Liquidity Ratio is the proportion of the Net Demand and Time Liabilities* that commercial banks have to keep as reserves in the form of cash, gold or government securities or any other form so prescribed.
- Rate and form in which it has to be kept is prescribed by the central bank(RBI).
- The concept of SLR is pretty much similar to that of CRR when it comes to the impact it has on the economy.
*Net Demand and Time Liabilities:
- Demand : Deposits which are available on demand.
- Time: Those which are payable to customers after a certain period of time. eg. Fixed Deposit
- Regulation of growth of credit in the economy.
- Help in checking inflation and deflation.
- Has a bearing on the interest offered on loans as well as deposits.
- With this, it has an indirect impact on the domestic investment.
- This further has a bearing on the economic growth of the country.
- It also protects the commercial banks from insolvency due to the availability of capital in form of ‘safe’ government security, gold or cash.
- If SLR decreases:
- Lesser cash as reserves–>The credit availability with the banks will increase .
- This may decrease the interest rates on loans while increasing the interest on demand and time deposits.
- Liquidity may increase due to easy loans.
- Possibility of increased inflation(due to greater in-hand money and thus greater demand).
- Domestic investment may increase.
- This may enhance the economic growth.
- If SLR increases:
- Greater cash as reserves–>Credit availability: decrease.
- Interest rate on loans: increase; on deposits: decrease.
- Liquidity : reduction.
- Inflation: decrease.
- Investment: may reduce.
- Economic growth: slowdown.
Current SLR: 21%
Difference between the SLR and CRR:
- CRR: kept in the form of cash; SLR: government securities, gold or cash.
- CRR: controls the liquidity in banking system primarily and then in the economy ; SLR: in the economy—>as CRR–>reserves with RBI; SLR: with the banks themselves.
- CRR already reduces the credit availability. SLR further aggrieves the reduced credit availability.
- SLR securities are low-risk securities, thus will bring low reward(basic principle of market economics–>low risk brings lower rewards)
Should it be removed?
- Arguments in Favour:
- increases the credit availability.
- better investment and growth(as no obligation of keeping reserves).
- free hand to the banks –>operate without many obligations–>will create a market-based environment and induce competition–>in turn improving performance.
- Arguments against:
- Impedes the impact of bank run–> a situation when a large number of customers withdraw cash from deposit accounts–> SLR securities can provide a cushion against such an abrupt withdrawal.
- Helps in avoiding the situation of insolvency.
- May help to tackle the increasing NPAs* to some extent.
*NPA–>Non-Performing Assets–>bad loans–>loans not returned within the stipulated period of time or even after that.(detailed description will be posted after a few posts).