Banking Terms often in news: Statutory Liquidity Ratio(SLR)

About:

  • 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

Purpose:

  • Regulation of growth of credit in the economy.

Significance:

  • 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.

Conceptual Understanding:

  • 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.

Issue:

  • 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).

 

 

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