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• SLR (Statutory Liquidity Ratio): It refers to the amount that the commercial banks require to maintain in the form of cash or cash equivalents comprising gold or govt. approved securities before providing credit to the customers.• By approved securities we mean bond and shares of different companies.• Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India.
SLR increase => Cash reserves of commercial banks decrease =>Rate of interest increase => Price of credit increase => Demandfor credit decrease => Credit contracts. &SLR decrease => Cash reserves of commercial banks increase=>Rate of interest decrease=> Price of credit decrease=> Demandfor credit increase=> Credit expands.
The main objectives for maintaining the Statutory Liquidity Ratioare the following:1. Statutory Liquidity Ratio is maintained in order to control theexpansion or contraction of Bank Credit. By changing the level ofStatutory Liquidity Ratio, Reserve bank of India can increase ordecrease bank credit.2. Statutory Liquidity Ratio in a way ensures the solvency ofcommercial banks.3. By determining Statutory Liquidity Ratio, Reserve Bank ofIndia, in a way, compels the commercial banks to invest ingovernment securities like government bonds.
It is determined as percentage of total demand and percentage oftime liabilities. Time Liabilities refer to the liabilities, which thecommercial banks are liable to pay to the customers on their anytimedemand. The liabilities that the banks are liable to pay within onemonths time, due to completion of maturity period, are alsoconsidered as time liabilities.Thus SLR Rate = Total Demand/Time Liabilities x 100The maximum limit of SLR is 40% and minimum limit of SLR is24%. The RBI as per need can ask banks to maintain SLR betweenthese two.
When the economy is faced with recession or inflation, SLR ratesare reduced or increased by the Reserve Bank of India in order toincrease or decrease the credit in the economy and cure thesituation through various instruments of monetary policy one ofwhich is Statutory Liquidity Ratio.
At the time of recession :- RBI reduces the SLR rate to increase credit availability sothat investment increase and further increase the aggregatedemand which ultimately leads to increase in prices.At the time of inflation:- RBI increases the SLR rates to decrease creditavailability so that investment decrease and further decrease theaggregate demand which ultimately leads to decrease in prices.
In November,2008 when RBI reduced the SLR rate by 1% to24% then economic times reported “A cut in SLR means that thehome, car and commercial loan rates will go down”.It also means that banks will now have the option of sellingRs. 40,000 crore of government securities that until nowformed part of their statutory investments.It was increased to 25% in 2009 and then was again reduced to24% in 2010.
•Liquidity conditions transited to a deficit mode towards end-May 2010 after remaining in surplus for 18 months.The Reserve Bank initiated several measures to ease the liquiditysituation. These were:RBI provided the additional liquidity support under theLiquidity Adjustment Facility (LAF) to commercial banks up toone per cent of their Net Demands and Time Liabilities (NDTL) .For a brief period the limit was two per cent of NDTL, whichwas reduced to one per cent following the permanent reduction inthe SLR by one per cent. The current SLR rate is 24%.
• Liquidity conditions have eased significantly in recent weeks, following a sharp reduction in government cash balances and moderation in the credit-deposit ratio of banks.• Consequently, net liquidity injected by the Reserve Bank through its repo operations declined from a daily average of around ` 1,20,000 crore in December 2010 to around ` 81,000 crore in March 2011. The average daily net liquidity injected by the Reserve Bank fell sharply to `19,000 crore in April 2011 as government balances moved from positive to negative.• In order to facilitate better liquidity management, the Reserve Bank extended the two liquidity easing measures, viz., additional liquidity support under the LAF to commercial banks up to one per cent of their NDTL and the SLAF on a daily basis up to May 6, 2011.
BY:-ANANT AGARWAL XI-D ROLL NO. 4