SLR Requirements

The Statutory Liquidity Ratio (SLR) is one of the key monetary policy instruments used by the RBI to regulate credit growth, ensure bank solvency, and channel funds into government securities. Understanding SLR requirements, eligible assets, and related instruments like CRR, LAF, and MSF is critical for the JAIIB exam.

Statutory Liquidity Ratio (SLR) is the minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained in the form of liquid assets.

Legal Basis

• Defined under Section 24 of the Banking Regulation Act, 1949
• Applicable to all Scheduled Commercial Banks
• RBI has the power to set SLR between 0% and 40% of NDTL
• Current SLR: 18% (as of latest RBI circular)

Eligible SLR Assets

• Cash (over and above CRR requirement)
• Gold valued at a price not exceeding current market price
• Unencumbered approved securities (primarily Government Securities)

NDTL is the base on which both CRR and SLR are calculated.

Components of NDTL

NDTL = Total Demand Liabilities + Total Time Liabilities - Inter-bank Deposits (net)

1. Ensure solvency: Banks maintain liquid assets that can be quickly converted to cash
2. Control credit expansion: Higher SLR reduces funds available for lending
3. Fund government borrowing: Banks are forced to invest in government securities
4. Reduce dependence on RBI: Banks have their own liquidity buffer

• Defined under Section 42 of the RBI Act, 1934
• Minimum cash balance that banks must maintain with RBI
• Calculated as a percentage of NDTL
• Banks earn no interest on CRR balances
• The 2006 amendment removed the earlier range of 3% to 20%
• Known as the Fractional Reserve Banking System — banks keep only a fraction as reserves

Impact of CRR

• Increase in CRR → Less money available for lending → Tighter liquidity
• Decrease in CRR → More money available for lending → Easier liquidity

LAF is the mechanism through which RBI manages day-to-day liquidity in the banking system.

Repo Rate

• Rate at which banks borrow from RBI against government securities as collateral
• Banks pledge securities and get funds
• Increase in repo rate → Borrowing becomes costlier → Credit tightens
• This is the benchmark policy rate of RBI

Reverse Repo Rate

• Rate at which banks park excess funds with RBI
• RBI borrows from banks to absorb excess liquidity
• Increase in reverse repo → Banks prefer parking with RBI → Less lending

Standing Deposit Facility (SDF)

• Replaced the fixed-rate reverse repo as the floor of the LAF corridor
• Banks deposit funds with RBI without any collateral
• SDF rate is the lower bound of the interest rate corridor

• Banks can borrow from RBI at MSF rate against SLR securities
• MSF rate = Repo Rate + 0.25% (typically)
• Banks can dip into their SLR portfolio up to a certain limit (currently 2% of NDTL)
• Acts as the ceiling of the LAF corridor
• Available for overnight borrowing only

LAF Corridor

MSF Rate (Ceiling)     ← Banks borrow in emergency
    |
Repo Rate (Policy Rate) ← Normal borrowing
    |
SDF Rate (Floor)        ← Banks park excess liquidity

• Rate at which RBI provides long-term lending to banks
• Applicable to all commercial banks
• Aligned with MSF rate
• Higher bank rate → costlier long-term funds → less lending
• Unlike repo, bank rate loans are without collateral

RBI buys or sells government securities in the secondary market to manage liquidity:

OMOs directly affect:

• Bond prices and yields
• Money supply in the economy

Term Repo

• Introduced in October 2013 for tenors of 7/14/28 days
• Helps develop interbank money market
• Sets market-based benchmarks for loan and deposit pricing

Long-Term Repo Operations (LTRO)

• Introduced in 2019 for 1-year and 3-year tenors
• Facilitates monetary transmission and supports credit offtake
• Conducted at prevailing repo rate

Targeted LTRO (TLTRO)

• Provides liquidity to specific stressed sectors
• Banks must lend the borrowed amount to specified segments
• Conducted on CBS (E-KUBER) platform at the prevailing policy repo rate
• Bids below or above policy rate are rejected

Special LTRO (SLTRO) for SFBs

• Small Finance Banks (SFBs) can borrow to lend to small business units and unorganised sectors
• Conducted on the E-KUBER platform at fixed repo rate

• Used by RBI to absorb excess liquidity from the banking system
• Operates on auction basis (variable rate, not fixed)
• RBI has been rebalancing surplus liquidity from fixed-rate reverse repo to VRRR of longer maturity
• Helps normalise liquidity conditions

RBI provides sector-specific refinance at rates linked to the policy repo rate to:

• NABARD (agriculture)
• SIDBI (small industries)
• NHB (housing)
• EXIM Bank (exports)

Money Supply Measures

Money Multiplier

Money Multiplier = M3 / M0 (Broad Money / Reserve Money)

Three key determinants:

1. Currency-to-deposit ratio (public behaviour)
2. Required reserves-to-deposits ratio (RBI policy — CRR)
3. Excess reserves maintained by banks (bank behaviour)

• SLR = 18% of NDTL, maintained in cash/gold/approved securities — Section 24, BR Act
• CRR = cash with RBI, earns no interest — Section 42, RBI Act
• NDTL = Demand Liabilities + Time Liabilities - Inter-bank deposits (net)
• Repo Rate: Banks borrow from RBI (policy rate); Reverse Repo: Banks park with RBI
• MSF = Repo + 0.25%; banks can use SLR securities (up to 2% NDTL); ceiling of LAF corridor
• SDF replaced fixed reverse repo as the floor of LAF corridor
• OMO: RBI buys securities → injects liquidity; sells → absorbs liquidity
• LTRO/TLTRO: Long-term liquidity at repo rate for specific sectors
• VRRR: Absorbs excess liquidity on variable rate auction basis
• Money Multiplier = M3/M0 — determined by currency ratio, CRR, and excess reserves
• Increase in CRR/SLR → less lending capacity; Decrease → more lending capacity
• Bank Rate aligned with MSF rate — for long-term lending without collateral