What is a Non SLR security – Detail the various Non SLR investment and analyses the risks in each of these non SLR investments

1. Name: Kalpesh Arvind Shah| Company Name: Antony Lara Enviro Solutions Pvt Ltd
Designation: Dy. General Manager Finance & Commercials (Corporate)
Batch: AMP 2017-18|Roll No: 1 (One)
Subject: Treasury Management
Topic: What is a Non SLR security – Detail the various Non SLR investment and analyses the
risks in each of these non SLR investments
Introduction:
As per the Banking Regulations Act 1949 The Statutory Liquidity Ratio is a prudential measure
under which all Scheduled Commercial Banks in India must maintain an amount in one of the
following forms as a percentage of their total Demand and Time Liabilities I) Cash II) Gold III)
Investments in un encumbered Instruments that include Firstly Treasury-Bills of the Government
of India ,Secondly Dated securities including those issued by the Government of India from time
to time under the market borrowings Programme and the Market Stabilization Scheme (MSS),
Thirdly State Development Loans issued by State Governments under their market borrowings
Programme Finally Other instruments as notified by the RBI. Traditionally the amount to be
held thus was stipulated to be no lower than 25 percent and not exceeding 40 percent of the
bank’s total DTL. However, effective from January 2007 the floor of 25 percent on the SLR was
removed following an amendment of the Banking Regulation Act, 1949.In contrast to the CRR,
under which banks have to maintain cash with the RBI, the SLR requires holding of assets
in one of the above three categories by the bank itself. For this purpose, while gold held as a part
of the SLR requirement is valued at a rate not exceeding the current market rate, valuation of
securities under category [iii] above is specified by the RBI from time to time. Specification of
cash and gold as permissible forms are primarily on the basis of these being safe and liquid. The
SLR requirement facilitates a captive market for government securities which in turn implies
negligible refinancing risks in the case of a debt crisis. If a bank fails to meet its SLR obligation,
a penalty in the form of a penal interest payable is imposed.
SLR is also a tool for controlling liquidity in the domestic market via manipulating bank credit.
A rise in SLR locks up increasing portion of a bank’s assets in the above three categories and
may squeeze out bank credit. In the wake of the global financial crisis, the SLR was reduced
from 25 percent to 24 percent in November 2008. As of April 2016, the SLR stands at 21.25
percent. The SLR status of securities issued by the Government of India and the State
Governments is indicated by the RBI in its press releases at the time of issuance while updated

2. list of SLR securities are available in the ‘Database on Indian Economy’ hosted in the website of
the bank www.rbi.org.in.
Updated Chart of SLR as below:
Effective Date Statutory Liquidity Ratio
14-Oct-17 19.50%
24-Jun-17 20.00%
7-Jan-17 20.50%
1-Oct-16 20.75%
9-Jul-16 21.00%
2-Apr-16 21.25%
7-Feb-15 21.50%
9-Aug-14 22.00%
14-Jun-14 22.50%
11-Aug-12 23.00%
18-Dec-10 24.00%
7-Nov-09 25.00%
8-Nov-08 24.00%
Besides giving loans to businesses and individuals, RBI has also allowed banks to invest in
various capital market instruments such as stocks and bonds issued by public and private sector
companies and commercial papers. In addition, banks are also allowed to invest in various
mutual fund schemes. Unlike SLR investments, there is no compulsion on banks to invest in
these instruments. Investments are entirely guided by commercial considerations and many such
investments are in accordance with the prescribed guidelines. RBI treats both loans extended by
commercial banks and the non-SLR investments as a resource flow to the commercial sector.
Hence, it includes both while making credit projections it is comfortable with to achieve the
targeted economic growth at the time of the monetary policy formulation during the beginning of
the fiscal year. Since SLR investments in bonds are issued by the government or its bodies, these
enjoy a sovereign protection, and hence, are perceived to be risk-free. However, in case of non-
SLR investments, the central bank attaches risk weights, depending on the industry and the state
of the perceived risk on that sector as a prudential measure.

3. The non-Statutory Liquidity Ratio (SLR) investments are those where the return is based on the
prospects of the commercial market. Apart from core business i.e. lending, the bank makes some
investment in
1. Equity/Preference Share
2. Corporate bonds and Debentures
3. Bonds and Debentures of PSU, Government or Semi Government autonomous bodies
4. Capital Market
5. Units of Mutual fund
6. Commercial paper
7. Government Bonds like UTI Bonds & Oil Bonds
8. Investment in abroad in shape of equity participation & subscribing to shares etc.
9. Infrastructure bonds of AFIs
Limit of investment on Non-SLR investment is prescribed on RBI time to time
The typical banking products dealing with non-SLR investment include stocks, debentures,
securities kept in demat accounts, mutual funds and similar capital market products.
Bonds – There are various types of bonds. While government bonds are SLR bonds, Public
Sector Undertaking Bonds (PSU Bonds) and Corporate Bonds are usually non-SLR investments.
These are high risk bonds. So, why do people lend their money on these bonds? These bonds
offer high interest rate than the government securities or government bonds. The non-SLR bonds
are sold on Private Placement Basis
Mutual Funds – These investments don’t have assured returns but have higher interest rate than
other investments. Some are exempted from tax as well under Section 80c of Income Tax Act
1961. In Mutual fund business, a group of investors pool money. The fund is professionally
managed and further re-invested in shares, bonds, securities, or other financial market
instruments. The yield depends on the market condition. Investors often opt for Systematic
Investment Plan (SIP) where little amount of money is deposited each month, just like a
recurrent deposit. The money is used by a professional body that buys stocks when the price is
low – but, has the potential of increasing the cost per share after few years. Equity Linked Saving
Scheme (ELSS) is one such type of non-SLR investment that also has tax saving options. From
Finance Bill 2005, tax saving can be made up to an amount of Rs. 1 Lakh.
CSGL Accounts – Demat accounts maintained only for transactions in shares and stocks are
usually held by individuals. And, when government-securities are kept with the RBI, it is kept in
special demat accounts, known as CSGL accounts. When the securities are sold or more
securities are purchased, money in the CSGL account is debited or credited. As it is a demat
account, securities remain in demat format and can be changed to the other format (physical)
only by the Gilt Account Holder.

4. Equities – Company securities are often traded in a special market, known as stock or equity
market. Various companies with the securities are listed in this market on stock exchange. People
with demat accounts in banks often buy or sell shares of the companies in this market, using the
data in the stock exchange. In other words, they are investing in equity and gaining better yield
when selling shares at high price and buying shares at a lower price. There is also income
through capital gains and dividends issued by the companies – who have sold the shares.
The stock exchange provides the necessary liquid asset needed for buying-selling or trading
shares. Today, introduction of computer-aided system and demat accounts have made equity
transaction quicker, profitable, and safer. Many banks allow such trading
Banking Awareness: Public Offerings (IPO’s) – Quite similar to equity, IPO is the trading of the
first set of stocks sold by a company to the public. When companies, usually startups want to
pool in money for further expansion, they do so by offering IPO. The capital is taken from the
public – in return for shares. Banks help in such transaction as well.
The demat account holder needs to pick the company and specify the details of the transaction.
The bank does the rest – from buying and collecting the stocks and depositing it in “demat”
format.
Derivatives – Banks also allow trading in derivatives. Derivative is a financial instrument that
offers ‘futures’ or ‘options’ agreement between two parties. Here, the value of the stocks
depends on the price of another object, known as underlying. One common example of using
derivatives option as a non-SLR investment is the ability to buy bulk of shares in smaller amount
than the actual price. The banks assist in non-SLR investment of this kind by offering
information on Trade Statistics, Open Interest, and so on.
Risk:
1. Debt Mutual Funds: Security Selection Process, Valuation, Marked to Model,
Concentration, Fees & Expenses, Exit Load, Mark Up/Mark Down, Fixed Maturity Plan
2. Liquid Mutual Funds: Liquidity Near Cash CBLO and Illiquid Holdings CP & CD,
Valuation, Transmission Risk, Tax Arbitrage, Circular Investing & Regulatory frown
3. Commercials Papers: Price adequacy in Risk Reward Ratio, the price Build in
“disruptive” market and financial distress, CP Bridge for Working Capital & Long Term
funding, Roll Over Risk, Cash Holding
4. Bonds: Trading and Accrual Investment Strategy, Liquidity Evaluation, Rating,
Benchmark, End use Tracking, Market Risk as well as Credit Risk, NAV & NRV,
Volume Weights, Uniformity in Rated & Unrated G Sec, Implied and Imputed Liquidity
5. Capital Market: Investment Risk, Market Risk, Credit Risk, Mismatch Risk, Liquidity
Risk, Currency Risk, Operational Risk, New Business Risk, Group Risk, Regulatory
Risk, Expenses Risk, Insurance Risk, Credit Risk
6. Equity Market : Capital Planning & Allocation , Advanced Project Management
,Capability Building , Risk Management ,Sovereign Risk, Supply Market Risk, Tariffs (
Import & Export) Risk, Skill Shortage Risk , Immature Supply Chains

5. Conditions and Safety measures:
1. Investment in perpetual debt instruments is not permitted.
2. Investment in unlisted securities should be subject to a minimum rating prescribed and
should not exceeded 10% of the total Non-SLR investment at any time.
3. Bank should comply with the instructions regarding investment policy and the dealings
in securities transactions.
4. There should be no default by the Bank in maintenance of statutory cash reserve and
liquid assets requirements as prescribed by the Reserve Bank of India Act, 1934/
Banking Regulation Act, 1949 (AACS).
5. Bank should have achieved the targets fixed by the Reserve Bank from time to time for
lending to priority sectors/weaker sections.
6. Overdues of Bank should not be more than 15% of their outstanding loans and
advances.
7. Bank should comply with the RBI instructions regarding income recognition, asset
classification and provisioning.
8. Bank should undertake usual due diligence in respect of investments in non-SLR
securities. Present RBI regulations preclude bank from extending credit facilities for
certain purposes.
9. Bank should ensure that such activities are not financed by way of funds raised through
the non-SLR securities.
10. All fresh investments under non-SLR category should be classified under Held for
Trading (HFT)/Available for Sale (AFS) categories only and marked to market as
applicable to these categories of investments.
11. Bank make all fresh Non-SLR debt investments only in listed debt securities of public
sector undertakings which comply with the requirements of SEBI circular dated
September 30, 2003.
12. Bank should not invest in Non-SLR debt securities of original maturity of less than one
year.
13. Bank should ensure that exposure, to a single issuer of debt securities is within the
individual exposure ceiling prescribed by RBI for grant of advances, based on capital
funds of the bank.
14. Banks are not permitted to invest in zero coupon bonds as per circular No. UCB.
(PCB) BPD. Cir No.36/16.20.000/2010-11 dated February 18, 2011.
Conclusion:
The non-Statutory Liquidity Ratio (SLR) investments are those where the return is based on the
prospects of the commercial market. The banks are not liable to invest in these forms of
investments. So, investors do not enjoy a secured risk-free return unlike the SLR investments.
Present Growth is Shown in below Chart 1 of SLR and Non SLR Securities in India

6. Chart II Break Up of Non SLR Securities
Reference Source:
Rbi Circulars, www.Investopedia.com, www.Bankersadda.com, www.pnbgilts.com,
Articles from Mr. K N Vaidyanathan
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Commercial Paper Shares Bonds Mutual funds Financial institutions