Statutory liquidity ratio (SLR)
The Reserve Bank of India (RBI) has mandated banks to maintain a statutory liquidity ratio (SLR) of 18%. The SLR maintained by banks is usually much higher than this. Particularly after the covid-19 outbreak, banks took to maintaining an even higher SLR. Mint explains.
What is SLR and how has it changed?
- Banks need to invest a certain proportion of their demand, time deposits in government securities (G-Secs) and other approved securities before offering credit.
- The SLR was at a high of 38.5% in the early 1990s. This was when banks in the country were government-owned.
- Since then, the SLR has been gradually brought down and now stands at 18%. Nevertheless, over the years, banks have typically ended up investing higher than required in government securities.
- Investment in government securities has gone through the roof since late March, in the aftermath of the spread of the covid-19 pandemic.
Where do investments in govt securities stand?
- Between 27 March and 31 July, banks have raised fresh deposits worth ₹5.95 trillion. Of this, around ₹5.32 trillion has been invested in government securities and other approved securities.
- This essentially means that close to 89.4% of the fresh deposits have been invested in government and other approved securities, as against the mandated 18%. It tells us multiple things.
- One, that people have been reluctant to borrow after March, following the covid-19 outbreak. Secondly, banks have been reluctant to lend as a whole. Lastly, even when banks have wanted to lend, there has mostly been a dearth of good borrowers.
What does an 89.4% ratio of new deposits in G-Secs say?
- Following the spread of coronavirus, and implications of curbs on activity, people began saving more, sensing a looming crisis.
- This had a direct impact on bank deposits. If we look at the comparable period in 2019, banks had raised fresh deposits worth ₹1.71 trillion then—around 29% of what they’ve raised in 2020. With this, investments in G-secs have shot up.