Section 24 of the Banking Regulation Act, 1949 contains a statutory requirement regarding the maintenance of liquid assets by banks in India. This section was amended by the Banking Laws (Amendment) Act, 1983. Before such amendment every banking company was required to maintain in India in cash, gold or unencumbered approved securities an amount which shall not at the close of business on any day be less than 25 percent of the total of its demand and time liabilities in India. After the amendment, the Reserve Bank has been empowered to step up this ratio up to 40% of the net demand and time liabilities, so as to compel the banks to keep a larger proportion of their deposit liabilities in liquid assets.
Successive increases in SLR during 1980’s:
Though before the enforcement of amendment to section 24 in March 1985, the Banking Regulation Act did not empower the Reserve Bank to enhance SLR from the statutory minimum level of 25%; in fact, exercising its power of moral suasion, it had in the past raised SLR successively to higher levels. It stood at 36% when the Amendment Act of 1983 was enforced in March 1985.
After the enforcement of the Banking Laws (Amendment) Act, 1983, the SLR has been raised to higher levels as follows:
From 36% to 36.5% of the net DTL, with effect from June 8, 1985
From 36.5% to 37% with effect from July 6, 1985
From 37% to 37.5% with effect from April 25, 1987
From 37.5% to 38% with effect from January 2, 1988
The Reserve Bank of India further raised SLR by a half a percentage point from 38 per cent of net demand and time liabilities to 38.5 per cent with effect from September 22, 1990. This step was taken as usual to curb monetary expansion and to moderate the pace of reserve money creation.
The deposit liabilities of the banks from Non-Resident Indians under the Non-Resident External Rupee accounts and Foreign Currency (non-resident) Accounts have been subjected to SLR at a lower rate of 25%. It has also been raised to 30% with the effect from July 28, 1990.
Effect of Higher SLR:
The Reserve Bank has used the instrument of SLR as a credit control method, because with every increase in SLR, the banks are required to maintain a larger portion of their funds in liquid assets, mainly the Government and other approved securities. Consequently, lending resources of the banks contract and their capacity to grant credit is reduced correspondingly. Thus by raising the SLR, bank funds are diverted from loans and advances to investment in Government and other approved securities. The instrument of SLR thus boosts up the flow of funds in the gilt-edged securities and ensures the success of the floatation of loans by the Government.
As the yield on gilt-edged securities was much lower than the interest charged on loans and advances, bank’s profitability was adversely affected as a consequence of a rise in SLR.
Reduction in SLR (1992 – 1997):
Accepting the recommendation of the Narasimham Committee I, the Reserve bank of India reduced SLR to 30% on the incremental deposits over the level as on April 1, 1992. Deposits as on that continued to be subject to SLR at the existing rate of 38.5 %. SLR was reduced by 0.75% on this category of deposits in 3 stages of 0.25 per cent each beginning with fortnight dated January 9, February 6 and March 1993.
During 1993, Reserve Bank of India further stepped down SLR two times. First, it was reduced from 37.75% to 36.75% in four phases from October 16, 1993, it was further reduced to 34.75% in four steps the level of outstanding liabilities as on September 17, 1993. In respect of any increase in liabilities above September 17, 1993 level, SLR was reduced to 25%. SLR was reduced to 34.25% on August 20, 1994 and further to 33.75% on September 17, 1994. The basic date for SLR on domestic NDTL was brought forward from September 17, 1993 to September 30, 1994 and SLR was fixed at 31.5%.
With effect from April 26, 1997 all scheduled commercial banks are exempted from maintenance of SLR on their net liabilities to the banking system (just as in case of CRR).
With effect from October 25, 1997 all scheduled commercial banks are required to maintain a uniform SLR of 25 per cent of their entire net demand and time liabilities. This is the minimum stipulated rate under Section 24 of the Banking Regulation Act, 1949. The reduction in SLR over these years has resulted in the improvement in profitability of banks as they have utilized their funds more profitability in loans and advances.