11/19/2014

Bankers Adda: What does a reduction in SLR mean?

What does a reduction in SLR mean?

Dear readers, As you know Reserve Bank of India has released Second BiMonthly Monetary Policy Statement and cut SLR by 50 basis points. So here
we are posting a post on SLR which will give you knowledge and also provide
basic information on SLR.

SLR (Statutory Liquidity Ratio): SLR is the amount a commercial banks

needs to maintain 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 RBI in order to control the
expansion of the bank credit.
The maximum limit of SLR is 40%
As on 3rd June 2014 RBI release Second Bi-Monthly Monetary Policy
Statement and cut SLR by 50 basis points, now current SLR is 22.5%,earlier
it was 23%.
Note: Basis points: 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, an
increase from 2% to 3% is an increase of one percentage point or 100 basis
points.

The main objectives for maintaining the SLR ratio are the following:
i. 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.
ii. to ensure the solvency of commercial banks.
iii. to compel the commercial banks to invest in government securities like
government bonds.
Main use of SLR:
SLR is used to control inflation and propel growth. Through SLR rate the
money supply in the system can be controlled effectively.
What is the difference between SLR and CRR?
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
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11/19/2014

Bankers Adda: What does a reduction in SLR mean?

approved securities where as with CRR it has to be only cash. CRR is

maintained in cash form with RBI, where as SLR is maintained in liquid form
with banks themselves.
What does a reduction in SLR mean?
A cut in SLR means that the home, car and commercial loan rates will go
down. Banks will have more money with them.
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
rate charged by banks to the private sector decreases.

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