SLR

Statutory Liquidity Ratio

Statutory  Liquidity  Ratio  is  the  amount  of  liquid  assets ,  such  as  cash , precious  metals  or  other approved  securities,  that  a  financial  institution  must  maintain  as  reserves  other  than  the  Cash with  the  Central  Bank . The  statutory  liquidity  ratio  is  a  term  most  commonly  used  in  India.

Objectives

The objectives of SLR are:

1.   To restrict the expansion of bank credit.

2.   To augment the investment of the banks in Government securities.

3.   To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India.

The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing or increasing the money supply in the system respectively. Indian banks’ holdings of government securities (Government securities) are now close to the statutory minimum that banks are required to hold to comply with existing regulation. When measured in rupees, such holdings decreased for the first time in a little less than 40 years (since the nationalisation of banks in 1969) in 2005-06.

While the recent credit boom is a key driver of the decline in banks’ portfolios of G-Sec, other factors have played an important role recently.

These include:

1.   Interest rate increases.

2.   Changes in the prudential regulation of banks’ investments in G-Sec.

Most G-Sec held by banks are long-term fixed-rate bonds, which are sensitive to changes in interest rates. Increasing interest rates have eroded banks’ income from trading in G-Sec.

Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around 108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. This was to increase lending by the banks to the corporates and resolve liquidity crisis. Providing economy with the much needed fuel of liquidity to maintain the pace of growth rate. However the exercise became futile with banks being over cautious of lending in highly shaky market conditions. Banks invested almost 70% of this money to rather safe Govt securities than lending it to corporates.

Current SLR Rate : 24 %
Source :  Internet  and Wikipedia