2. • SLR (Statutory Liquidity Ratio):
It refers to the amount that the commercial banks require to
maintain in the form of cash or cash equivalents comprising
gold or govt. approved securities before providing credit to the
customers.
• By approved securities we mean bond and shares of different
companies.
• Statutory Liquidity Ratio is determined and maintained by the
Reserve Bank of India.
3. SLR increase => Cash reserves of commercial banks decrease =>
Rate of interest increase => Price of credit increase => Demand
for credit decrease => Credit contracts.
&
SLR decrease => Cash reserves of commercial banks increase=>
Rate of interest decrease=> Price of credit decrease=> Demand
for credit increase=> Credit expands.
4. The main objectives for maintaining the Statutory Liquidity Ratio
are the following:
1. Statutory Liquidity Ratio is maintained in order to control the
expansion or contraction of Bank Credit. By changing the level of
Statutory Liquidity Ratio, Reserve bank of India can increase or
decrease bank credit.
2. Statutory Liquidity Ratio in a way ensures the solvency of
commercial banks.
3. By determining Statutory Liquidity Ratio, Reserve Bank of
India, in a way, compels the commercial banks to invest in
government securities like government bonds.
5. It is determined as percentage of total demand and percentage of
time liabilities. Time Liabilities refer to the liabilities, which the
commercial banks are liable to pay to the customers on their anytime
demand. The liabilities that the banks are liable to pay within one
month's time, due to completion of maturity period, are also
considered as time liabilities.
Thus SLR Rate = Total Demand/Time Liabilities x 100
The maximum limit of SLR is 40% and minimum limit of SLR is
24%. The RBI as per need can ask banks to maintain SLR between
these two.
6. When the economy is faced with recession or inflation, SLR rates
are reduced or increased by the Reserve Bank of India in order to
increase or decrease the credit in the economy and cure the
situation through various instruments of monetary policy one of
which is Statutory Liquidity Ratio.
7. At the time of recession :-
RBI reduces the SLR rate to increase credit availability so
that investment increase and further increase the aggregate
demand which ultimately leads to increase in prices.
At the time of inflation:-
RBI increases the SLR rates to decrease credit
availability so that investment decrease and further decrease the
aggregate demand which ultimately leads to decrease in prices.
8.
9. In November,2008 when RBI reduced the SLR rate by 1% to
24% then economic times reported “A cut in SLR means that the
home, car and commercial loan rates will go down”.
It also means that banks will now have the option of selling
Rs. 40,000 crore of government securities that until now
formed part of their statutory investments.
It was increased to 25% in 2009 and then was again reduced to
24% in 2010.
10. •Liquidity conditions transited to a deficit mode towards end-
May 2010 after remaining in surplus for 18 months.
The Reserve Bank initiated several measures to ease the liquidity
situation. These were:
RBI provided the additional liquidity support under the
Liquidity Adjustment Facility (LAF) to commercial banks up to
one per cent of their Net Demands and Time Liabilities (NDTL) .
For a brief period the limit was two per cent of NDTL, which
was reduced to one per cent following the permanent reduction in
the SLR by one per cent. The current SLR rate is 24%.
11. • Liquidity conditions have eased significantly in recent
weeks, following a sharp reduction in government cash balances
and moderation in the credit-deposit ratio of banks.
• Consequently, net liquidity injected by the Reserve Bank through its
repo operations declined from a daily average of around ` 1,20,000
crore in December 2010 to around ` 81,000 crore in March 2011.
The average daily net liquidity injected by the Reserve Bank fell
sharply to `19,000 crore in April 2011 as government balances
moved from positive to negative.
• In order to facilitate better liquidity management, the Reserve
Bank extended the two liquidity easing measures, viz., additional
liquidity support under the LAF to commercial banks up to one per
cent of their NDTL and the SLAF on a daily basis up to May
6, 2011.
