Find correct statements about statutory liquidity ratio (slr) 1. To meet slr, commercial banks can keep cash only. 2. Slr is maintained by the banks with themselves. 3. Slr restricts the banks leverage in pumping more money into the economy. Answer codes: (a) 1, 2 and 3 (b) 1 and 3
Answers
answer;
Every bank must have a minimum portion of their Net Demand and Time Liabilities (NDTL) in the form of cash, gold or other liquid assets by the day’s end. The ratio of these liquid assets to the demand and time liabilities is called as the Statutory Liquidity Ratio. The Reserve Bank of India has the authority to increase this ratio up to 40%. The increase in this ratio constricts the ability of the bank to inject money into the economy.
In India, the Reserve Bank of India is responsible for regulating the supply of money and stability of prices to run the economy. Statutory Liquidity Ratio is one of its many monetary policies for the same. SLR (among other tools) is instrumental in ensuring the solvency of the banks and money flow in the economy.
Section 24 and Section 56 of the Banking Regulation Act 1949 mandates all commercial banks in India to maintain SLR. It becomes pertinent to know in detail about the components of the SLR as mentioned below.
a. Liquid Assets
These are assets one can easily convert into cash – like gold, treasury bills, govt-approved securities, government bonds and cash reserves. Additionally, it also consists of securities, eligible under Market Stabilization Schemes and those under the Market Borrowing Programmes.
b. Net Demand and Time Liabilities (NDTL)
NDTL refers to the total demand and time liabilities (deposits) that is held by the banks of public and with other banks. Demand deposits consist of all liabilities which the bank needs to pay on demand. They include current deposits, demand drafts, balances in overdue fixed deposits and demand liabilities portion of savings bank deposits.
Time deposits consist of deposits that need to repay on maturity, where the depositor can’t withdraw money immediately. Instead, he must wait until the lock-in tenure is over to access the funds. Fixed deposits, time liabilities portion of savings bank deposits and staff security deposits are some examples. The liabilities of a bank include call money market borrowings, certificate of deposits and investment deposits in other banks.
c. SLR Limit
The SLR has an upper limit of 40% and a lower limit of 23%.
3. Objectives of Statutory Liquidity Ratio
a. To curtail the commercial banks from over liquidating:
This can happen in the absence of SLR, when the Cash Reserve Ratio goes up and the bank is in dire need of funds. RBI employs SLR regulation to have control over the bank credit. It helps to ensure that there is solvency in commercial banks and assures that banks invest in government securities.
b. To increase or decrease the flow of bank credit:
The Reserve Bank of India raises SLR to control the bank credit during the time of inflation. Similarly, it decreases the SLR during the time of recession to increase the bank credit.
4. Difference between SLR & CRR
Both SLR and CRR are the components of the monetary policy. However, there are a few differences between them. The following table gives a glimpse into the dissimilarities:
Statutory Liquidity Ratio (SLR) Cash Reserve Ratio (CRR)
In case of SLR, banks are asked to have reserves of liquid assets which include both cash and gold. The CRR requires banks to have only cash reserves with the RBI
Banks earn returns on money parked as SLR Banks don't earn returns on money parked as CRR
SLR is used to control the bank's leverage for credit expansion. The Central Bank controls the liquidity in the Banking system with CRR.
In case of SLR, the securities are kept with the banks themselves which they need to maintain in the form of liquid assets. In CRR, the cash reserve is maintained by the banks with the Reserve Bank of India.
Answer:
2 and 3
Explanation: