Statutory Liquidity Ratio
The Statutory Liquidity Ratio (SLR) is a prudential measure under which (as per the Banking Regulations Act 1949) all Scheduled Commercial Banks in India must maintain an amount in one of the following forms as a percentage of their total Demand and Time Liabilities (DTL) / Net DTL (NDTL);
[ii] Gold; or
[iii] Investments in un-encumbered Instruments that include;
(a) Treasury-Bills of the Government of India.
(b) Dated securities including those issued by the Government of India from time to time under the market borrowings programme and the Market Stabilization Scheme (MSS).
(c) State Development Loans (SDLs) issued by State Governments under their market borrowings programme.
(d) Other instruments as notified by the RBI.
Traditionally the amount to be held thus was stipulated to be no lower than 25 percent and not exceeding 40 percent of the bank’s total DTL. However, effective from January, 2007 the floor of 25 percent on the SLR was removed following an amendment of the Banking Regulation Act, 1949.
In contrast to the CRR, under which banks have to maintain cash with the RBI, the SLR requires holding of assets in one of the above three categories by the bank itself. For this purpose, while gold held as a part of the SLR requirement is valued at a rate not exceeding the current market rate, valuation of securities under category [iii] above is specified by the RBI from time to time. Specification of cash and gold as permissible forms are primarily on the basis of these being safe and liquid.
The SLR requirement facilitates a captive market for government securities which in turn implies negligible refinancing risks in the case of a debt crisis. If a bank fails to meet its SLR obligation, a penalty in the form of a penal interest payable is imposed.
SLR is also a tool for controlling liquidity in the domestic market via manipulating bank credit. A rise in SLR locks up increasing portion of a bank’s assets in the above three categories and may squeeze out bank credit.
In the wake of the global financial crisis, the SLR was reduced from 25 percent to 24 percent in November, 2008. As of April 2016 the SLR stands at 21.25 percent. The SLR status of securities issued by the Government of India and the State Governments is indicated by the RBI in its press releases at the time of issuance while updated list of SLR securities are available in the ‘Database on Indian Economy’ hosted in the website of the bank www.rbi.org.in.
- Marginal Standing Facility (MSF)
- cash reserve ratio (CRR)
- Liquidity Adjustment Facility (LAF)
- Base Rate
- Market Stabilization Scheme (MSS)
- Policy Rate
- Bank Rate
- Interest Rate Corridor
- Repo and Reverse Repo Rate