With reference to the Statutory Liquidity Ratio (SLR), consider the following observations:
1. Banks can keep cash, government bonds as well as gold to meet their SLR requirements
2. SLR is one of the means to finance government’s fiscal deficit
Which of the above is / are correct statements?
The Economic Survey has made a case to bring down the SLR gradually while discussing about the “double financial repression” being faced by the PSU banks. On one side, they need to keep higher protion of their assets as SLR while on the other hand, they have to comply with the Priority sector requirements. This is what has been called “double financial repression”.
The Statutory Liquidity Ratio is a requirement on banks to hold a certain share of their resources in liquid assets such as cash, government bonds and gold. In principle, the SLR can perform a prudential role because any unexpected demand from depositors can be quickly met by liquidating these assets.
SLR requirements have traditionally been high. From 38 per cent in the period before 1991, there was a dramatic decline to about 25 per cent at the end of the 1990s. Since then however, the number has hovered around the quarter century mark, only recently falling to 22 per cent. As of Feb 4, 2015 the minimum requirement is 21.5 per cent of total assets. Banks typically keep more than the required SLR, the current realised SLR is in fact over 25 per cent.
In practice, the SLR has become a means of financing (at less than market rates presumably) a bulk of the government’s fiscal deficit, suggesting that SLR cuts are related to the government’s fiscal position.
This question is a part of GKToday's Integrated IAS General Studies Module