1/16/2015

BankersAdda:ABriefofSLR

ABriefofSLR
StatutoryLiquidityRatioistheamountacommercialbanksneedstomaintain
in the form of cash, or gold, or govt. approved securities (Bonds) before
providing credit to its customers. SLR rate is determined and maintained by
RBIinordertocontroltheexpansionofthebankcredit.
ThemaximumlimitofSLRis40%

CurrentSLRis22%ofNDTL
WhatisaBasispoint?
It is the increase in interest rates in
percentage terms. For instance, if the
interest rate increases by 50 basis
points (bsp), then it means that
interest rate has been increase by
0.50%. One percentage point is
broken down into 100 basis points.
Therefore,anincreasefrom2%to3%
isanincreaseofonepercentagepoint
or100basispoints.
NDTL is the sum of all the demand (current account and savings account
suminbank)andtime(fixeddepositsorrecurringdepositsetc.whichareto
be paid on maturation), these are assets for us but a liability(debt) for the
banks.
HereisanexampletoshowtheeffectofCRRandSLR.

LetsayourLenaBankhad100RsasNDTLtheycangivethismuchamount
ofloantotheneedyhenceRs100willflowinthemarket(cancauseinflation),
soMr.Bond(RajanofRBI)saidkeep4%(CRR)withusand22%asSLRin
theformofgovtsecuritiesandgold(whichcantbegivenasloans)soLena
bank is left with only 74% [100 (22 + 4)] of the NDTL resulting in lesser
moneytobegivenasloansandeventuallyresultinginacheckoninflation.
ThemainobjectivesformaintainingtheSLRratioarethefollowing:
i. to control the expansion of bank credit. By changing the level of SLR, the
ReserveBankofIndiacanincreaseordecreasebankcreditexpansion.
ii.toensurethesolvencyofcommercialbanks.
iii. to compel the commercial banks to invest in government securities like
governmentbonds.
MainuseofSLR:
SLR is used to control inflation and propel growth. Through SLR rate the
moneysupplyinthesystemcanbecontrolledeffectively.

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1/16/2015

BankersAdda:ABriefofSLR

WhatisthedifferencebetweenSLRandCRR?
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
maintainedincashformwithRBI,whereasSLRismaintainedinliquidform
withbanksthemselves.
WhatdoesareductioninSLRmean?
A cut in SLR means that the home, car and commercial loan rates will go
down.Bankswillhavemoremoneywiththem.
With the reduction of SLR, the RBI is shrinking the market for government
securities and simultaneously enlarging availability of credit to the private
sector. With that, the cost of funds to the government will increase and the
ratechargedbybankstotheprivatesectordecreases.

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