RBI cuts SLR…but what is SLR?

The Reserve Bank of India today reduced the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 23% to 22.5% of their NDTL (net demand and time liability) with effect from the fortnight beginning June 14, 2014.  

A reduction in the required SLR will give banks more freedom to expand credit to the non-Government sector. However, the Reserve Bank is also cognisant of the significant on-going financing needs of the Government. Therefore, the SLR is reduced by 0.50 per cent of NDTL, with any further change dependent on the likely path of fiscal consolidation, the RBI stated.

So what is SLR? All banks need to maintain 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). 

Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as percentage of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand. example of time liability is a fixed deposits for 6 months, which is not payable on demand but after six months. example of demand liability is deposit maintained in saving account or current account, which are payable on demand through a withdrawal form of a cheque. SLR is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved liabilities(deposits).

The main objectives for maintaining the SLR ratio are the following:

• To control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.
• To ensure the solvency of commercial banks.
• To compel the commercial banks to invest in government securities like government bonds.