7/5/2014 Bankers Adda: Banking Concepts - SLR Non SLR Investments

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Banking Concepts - SLR Non SLR Investments
What are SLR investments?
As part of prudential guidelines, central banks require lenders to maintain
a portion of their deposits in liquid assets. These liquid assets can be
cash, gold or government securities.
The ratio of prescribed liquid investments to deposits is termed as
statutory liquidity ratio. In India, banks invest in bonds issued by the
government and notified by the Reserve Bank of India as qualifying for SLR
to meet the prescribed ratio. Currently, the prescribed statutory liquidity
ratio for banks is 23% of their deposits. SLR is occasionally used as
monetary policy tool and the stipulation is made by authorities, keeping in
mind the monetary policy objectives.
What are non-SLR investments?
Besides giving loans to businesses and individuals, RBI has also allowed
banks to invest in various capital market instruments such as stocks and
bonds issued by public and private sector companies and commercial
papers. In addition, banks are also allowed to invest in various mutual fund
schemes. Unlike SLR investments, there is no compulsion on banks to
invest in these instruments. Investments are entirely guided by
commercial considerations and many such investments are in accordance
with the prescribed guidelines.
How are non-SLR investments and loans linked?
RBI treats both loans extended by commercial banks and the non-SLR
investments as a resource flow to the commercial sector. Hence, it
includes both while making credit projections it is comfortable with to
achieve the targeted economic growth at the time of the monetary policy
formulation during the beginning of the fiscal year.
Is there any differential treatment for the two types of investments?
Since SLR investments in bonds are issued by the government or its
bodies, these enjoy a sovereign protection, and hence, are perceived to be
risk-free. However, in case of non-SLR investments, the central bank
attaches risk weights, depending on the industry and the state of the
perceived risk on that sector as a prudential measure.