Statutory Liquidity Ratio

Statutory Liquidity Ratio

Statutory Liquidity Ratio

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Description:
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’...
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