Ordinance Released for Removing Minimum Ceiling of Statutory Liquidity Ratio

Statutory Liquidity Ratio or SLR is an important aspect of the Indian banking sector. The ordinance released for removing the Minimum Ceiling of Statutory Liquidity Ratio (SLR) is also significant for bringing changes in the operations and functionality of commercial banking institutions in India. The ratio plays an important role in regulating lending and financial operations. Here the details have been discussed.

What is a Statutory Liquidity Ratio?

Statutory Liquidity Ratio or SLR is the lowest reserve the commercial banking institutions in India are required to maintain at all times without exception. It is decided by the Reserve Bank of India. As per the banking rules and regulations in the Indian Constitution, the guidelines were provided by the Reserve Bank of India in 1949 in the Banking Regulation Act in the Twenty-fourth chapter. The guidelines were further amended in 2007. 

Why should it be reduced?

The statutory Liquidity Ratio provides an obstacle in the provision of loans offered by commercial banking institutions. The minimum reserve prevents them from lending as much amount of money as they will be able to if there was no minimum ceiling for mandatory reserve. 

There is a significant unbalance in the growth rate of the loans and the deposited amounts in the banks. The change in the ordinance and the Ordinance released for removing the minimum ceiling of Statutory Liquidity Ratio (SLR) will help in correcting the unbalance and improving the economic condition of the country.

Furthermore, there is an increase in recent years in lending to the governments and it is putting an additional burden on the commercial banking sectors. But the Ordinance released for removing the minimum ceiling of Statutory Liquidity Ratio (SLR) might help in easing up the burden and might provide support for privatized development. 

Who are the beneficiaries?

The ordinance released for removing the minimum ceiling of the Statutory Liquidity Ratio might be beneficial to both commercial banking organizations and to customers, especially those who take loans for education or commercial purpose such as for starting a business, continuing an ongoing venture, and so on.

The commercial banking organizations will be the primary beneficiaries and the government will also benefit from the Ordinance released for removing the minimum ceiling of Statutory Liquidity Ratio (SLR) in the long run.

Discussion around its removal 

On March 2020, September 2020, and December 2020, three press releases took place where there were discussions around MSF or Marginal Standard Facilities. According to those instructions, the commercial banking sector could dip into their Statutory Liquidity Fund and utilize it according to their own requirements for providing loans and other facilities to the customers. This facility was extended first up to March 2021 and then up to September 2021. During this period, the minimum ceiling for Statutory Liquidity Ratio (SLR) was relaxed and the banks could use their reserved capital for the purpose of meeting their Liquidity Coverage Ratio (LCR).

The guidelines provided by the Reserve Bank of India regarding the calculation of Statutory Liquidity Ratio (SLR) are similar to the guidelines for calculations of CRR, or Cash Reserve Ratio. Some liabilities and responsibilities of the banks are exempted and some other considerations are added. The relaxation provided by the government regulations will also be considered in the calculation of the Liquidity Coverage Ratio (LCR) and for the calculation of their liquid assets. However, as per the amendment, the commercial banking organizations were allowed a 40 % of minimum ceiling for Statutory Liquidity Ratio (SLR).

In 2021, there were large numbers of discussion sessions in the parliament regarding the passing of the Ordinance released for removing the minimum ceiling of Statutory Liquidity Ratio (SLR). According to the discussions, there were several opinions about the reduction of the minimum ceiling of Statutory Liquidity Ratio (SLR). While some experts and political leaders were in favor of reducing it to 25 % of the total assets reserved and used by the commercial banking organizations, others were in favor of lowering it further, up to 20 %. 

Conclusion

It is not enough to know about only the Ordinance Released for Removing Minimum Ceiling of Statutory Liquidity Ratio. You should also look into the Cash Reserve Ratio or CRR, Liquidity Coverage Ratio or LCR, and floors and ceilings of the banking sector for investment and reinvestment. Only then it will be easy to understand the operation, corporate strategies, loopholes, advantages and disadvantages, and the principle behind those in the commercial banking organizations.