Statutory Liquidity Ratio

Every bank in India has to maintain at the close of business every day, a minimum proportion of their net demand and time liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR).

In simple words, it is the percentage of total deposits banks have to invest in government bonds and other approved securities. A SLR bond also qualifies for the portfolio maintained by banks to meet the liquidity requirement. RBI in November cut the SLR for banks by one percentage point and it now stands at 24%.

What is the difference between SLR and CRR?
What SLR does is it restricts the bank’s leverage in pumping more money into the economy. On the other hand, CRR, or cash reserve ratio, is the portion of deposits that the banks have to maintain with the RBI. Higher the ratio, the lower is the amount that banks will be able to use for lending and investment.

The other difference is that to meet SLR, banks can use cash, gold or approved securities where as with CRR it has to be only cash. CRR is maintained in cash form with RBI, where as SLR is maintained in liquid form with banks themselves.

What does a reduction in SLR mean?
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.

The RBI is empowered to increase this ratio up to 40%. An increase in SLR also restricts the bank’s leverage position to pump more money into the economy.

Could there be further cuts in SLR?
There is speculation that the rate may go down further to induce liquidity into the system. Risk appetite will take some time to normalise leading to continued intervention by RBI. Also near halving of non-bank sources of funds make the possibility of further SLR cuts a possibility in the near future.

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