RBI'S SLR GUIDELINES AND THEIR SIGNIFICANCE TO BANKS' INVESTMENT PORTFOLIO

ASSIGNMENT 6
Submitted By:

Prateek Rastogi Dhruv Chopra Harsh Cariappa

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Statutory Liquidity Ratio

Statutory Liquidity Ratio is in the form of cash (book value), gold (current market valu) and balances in unencumbered approved securities. Its the percentage of Demand and Time Liability that banks need to have in any or combination of the following forms: i) ii) iii) Cash Gold valued at a price not exceeding the current market price, Unencumbered approved securities (G Secs or Gilts come under this) valued at a price as specified by the RBI from time to time.

The maximum limit of SLR is 40% and minimum limit of SLR is 23%. Its 23% now. This restriction is imposed by RBI on banks to make funds available to customers on demand as soon as possible. Gold and G Secs (or Gilts) are included along with cash because they are highly liquid and safe assets. The RBI can increase the SLR to contain inflation, suck liquidity in the market, to tighten the measure to safeguard the customers money. In a growing economy banks would like to invest in stock market, not in G Secs or Gold as the latter would yield less returns. One more reason is long term G Secs (or any bond) are sensitive to interest rate changes. But in an emerging economy interest rate change is a common activity.

Maintenance of Statutory Liquidity Ratio (SLR)

Consequent upon amendment to the Section 24 of the Banking Regulation Act,1949 through the Banking Regulation (Amendment) Act, 2007 replacing the Regulation (Amendment) Ordinance, 2007, effective January 23, 2007, the Reserve Bank can prescribe the SLR for SCBs in specified assets. The value of such assets of a SCB shall not be less than such percentage not exceeding 40 per cent of its total DTL in India as on the last Friday of the second preceding fortnight as the Reserve Bank may, by notification in the Official Gazette, specify from time to time.

SCBs can participate in the Marginal Standing Facility (MSF) scheme introduced by Reserve Bank with effect from May 09, 2011. Under this facility, the eligible entities may borrow up to two per cent of their respective NDTL outstanding at the end of the second preceding fortnight from April 17, 2012. Additionally, the eligible entities may also continue to access overnight funds under this facility against their excess SLR holdings. In the event, the banks SLR holding falls below the statutory requirement up to two per cent of their NDTL, banks will not have the obligation to seek a specific waiver for default in SLR compliance arising out of use of this facility in terms of notification issued under sub section (2A) of section 24 of the Banking Regulation Act, 1949. Explanation: 1. For the above purpose, "market borrowing programme" shall mean the domestic rupee loans raised by the Government of India and the State Governments from the public and managed by the Reserve Bank of India through issue of marketable securities, governed by the Government Securities Act, 2006 and the Regulations framed there under, through an auction or any other method, as specified in the Notification issued in this regard. 2. Encumbered SLR securities shall not be included for the purpose of computing the percentage specified above. Provided that for the purpose of computing the percentage of assets referred to hereinabove, the following shall be included, namely: (i) securities lodged with another institution for an advance or any other credit arrangement to the extent to which such securities have not been drawn against or availed of; and, (ii) securities offered as collateral to the Reserve Bank of India for availing liquidity assistance from Marginal Standing Facility (MSF) up to two percent of the total NDTL in India carved out of the required SLR portfolio of the bank concerned.

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In computing the amount for the above purpose, the following shall be deemed to be cash maintained in India:

(i) The deposit required under sub-section (2) of Section 11 of the Banking Regulation Act, 1949 to be made with the Reserve Bank by a banking company incorporated outside India; (ii) Any balances maintained by a scheduled bank with the Reserve Bank in excess of the balance required to be maintained by it under Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (iii) Net balances in current accounts with other scheduled commercial banks in India.

Procedure for Computation of SLR

The procedure to compute total NDTL for the purpose of SLR under Section 24 (2) (B) of B.R. Act 1949 is broadly similar to the procedure followed for CRR. The liabilities mentioned under Section 1.11 will not form part of liabilities for the purpose of SLR also. SCBs are required to include inter-bank term deposits / term borrowing liabilities of all maturities in 'Liabilities to the Banking System'. Similarly, banks should include their interbank assets of term deposits and term lending of all maturities in 'Assets with the Banking System' for computation of NDTL for SLR purpose. Classification and Valuation of Approved Securities for SLR As regards classification and valuation of approved securities, banks may be guided by the instructions contained in our Master Circular (as updated from time to time) on Prudential Norms for classification, valuation and operation of investment portfolio by banks. Penalties If a banking company fails to maintain the required amount of SLR, it shall be liable to pay to RBI in respect of that default, the penal interest for that day at the rate of three per cent per annum above the Bank Rate on the shortfall and if the default continues on the next

succeeding working day, the penal interest may be increased to a rate of five per cent per annum above the Bank Rate for the concerned days of default on the shortfall. Return in Form VIII (SLR) i) Banks should submit to the Reserve Bank before 20th day of every month, a return in Form VIII showing the amounts of SLR held on alternate Fridays during immediate preceding month with particulars of their DTL in India held on such Fridays or if any such Friday is a Public Holiday under the Negotiable Instruments Act, 1881, at the close of business on preceding working day. ii) Banks should also submit a statement as annexure to Form VIII return giving daily position of (a) assets held for the purpose of compliance with SLR, (b) the excess cash balances maintained by them with RBI in the prescribed format, and (c) the mode of valuation of securities. Correctness of Computation of DTL to be certified by Statutory Auditors The Statutory Auditors should verify and certify that all items of outside liabilities, as per the banks books had been duly compiled by the bank and correctly reflected under DTL/NDTL in the fortnightly/monthly statutory returns submitted to Reserve Bank for the financial year.

SLRs Significance to Banks Investment Portfolio:

SLR cut helps to make credit available to retail and corporate borrowers and also keep interest rates under control. The monetary policy statement is thats why really important to decipher the movement of SLR. The bigger impact of SLR is that it will help banks to continue providing credit and not worry about contributing to SLR, which in a way is a growth oriented. The lower SLR proves to be positive in the when the demand for credit could rise. The SLR cut does not affect the bottom line so much, because in any case SLR securities earn you 7% to 8% and you will deploy it at 11%. So the margin is only 3%. That is where the CRR is great because the entire 11% comes to the bottom line.

The Latest Event:

The heightening risk to inflation has prompted the RBI to keep policy rates unchanged in the first quarter review of the monetary policy. This is even as growth is slowing. The central bank, however, cut the Statutory Liquidity Ratio (SLR) from 24 per cent to 23 per cent of deposits so that banks which are facing a deficit can tide over it. Bankers say they will soon take a call on cutting deposit and lending rates by convening meeting of their asset-liability committees. According to Mr Alok Misra, Chairman, Indian Banks Association, and Chairman and Managing Director, Bank of India, It was a very balanced policy action in view of the global economic outlook. An SLR reduction will add about Rs 66,000 crore to the system which will lead to increased credit flow.

State Bank of India (SBI) Chairman, Mr Pratip Chaudhuri, said the RBI has not disappointed the banks in its last two policy announcements. He said the benefit of the SLR cut can be passed on to the retail sector.

The SBI chief observed that resources unlocked on account of the SLR cut would largely go to the retail sector as large term loan proposals are very few across banks and working capital demand from good corporates is already low. Hence, for a bank like ours, the option is to accelerate retail credit growth. There could be greater competition in retail and this can be backed by a rate cutSo there could be a reduction in retail lending rates, Mr Chaudhari added.

The SBI chief does not see a reduction in short-term deposit rates due to competition.

As expected the Reserve Bank of India (RBI) has kept key policy rates unchanged, reducing only the statutory liquidity ratio (SLR) to 23% by 100 basis points (bps). This reduction is aimed at ensuring free flow of credit growth through enough liquidity in the system.

Lauding the central bank's latest move, Indian Banks Associtaion (IBA) says that the SLR cut will release Rs 66000 crore in the system and will lead to increased lending.

However, bankers are unlikely to reduce deposit rates going forward. There is something to cheer up for the retail lenders, though, as IBA adds that there could be cut in retail rates to attract customers. Will see transfer of SLR funds to real sector, it adds.

At the same time, IBA says that Short-term deposit rate cuts look difficult. As most banks have excess SLR positions IBA sees some room for banks to cut long-term deposit rates.

It also informed that asset liability committee may meet today or on Wednesday. While few bankers believe that SLR cut would not have any sharp impact on deposit, lending rates immediately, Pratip Chaudhuri, chairman, SBI foresees some scope for rate cut by banks.

"For example last time RBI made available refinance on export credit, which in our case gave liquidity of Rs 6,500 crore and this time additional SLR is leading to Rs 10,000 crore for us," he explained.

There would now be transfer of resources from the SLR to real sector whether private or public. There could be a cut in the interest rate at the retail level, he added.

Cut in SLR would usher in more funds to lend and it boards well with the central banks monetary policy stance, said Chanda Kochhar, managing director and chief executive officer, ICICI Bank.

RBI wants to convey that while the focus has to be on controlling inflation, more liquidity has to be provided so that it flows into productive asset.

References: RBI master circular CRR and SLR Business line August 1 Editorial