Context: Recently, the Reserve Bank of India (RBI) has mandated banks to maintain a statutory liquidity ratio (SLR) of 18%. 

• The SLR maintained by banks is usually much higher than this. Particularly after the covid-19 outbreak, banks took to maintaining an even higher SLR. 

What is SLR and how has it changed? 

• Under this, Banks need to invest a certain proportion of their demand, time deposits in government securities (G-Secs) and other approved securities before offering credit.  
• The SLR was at a high of 38.5% in the early 1990s. This was when banks in the country were government-owned.  
• Since then, the SLR has been gradually brought down and now stands at 18%. Nevertheless, over the years, banks have typically ended up investing higher than required in government securities.  
• Investment in government securities has gone through the roof since late March, in the aftermath of the spread of the covid-19 pandemic. 

Where do investments in govt securities stand? 

• Between 27 March and 31 July, banks have raised fresh deposits worth Rs 5.95 trillion. Of this, around Rs 5.32 trillion has been invested in government securities and other approved securities.  
• This essentially means that close to 89.4% of the fresh deposits have been invested in government and other approved securities, as against the mandated 18%. It tells us multiple things.  

One, that people have been reluctant to borrow after March, following the covid-19 outbreak. Secondly, banks have been reluctant to lend as a whole. Lastly, even when banks have wanted to lend, there has mostly been a dearth of good borrowers. 

What does an 89.4% ratio of new deposits in G-Secs say? 

• Following the spread of coronavirus, and implications of curbs on activity, people began saving more, sensing a looming crisis.  

This had a direct impact on bank deposits. If we look at the comparable period in 2019, banks had raised fresh deposits worth Rs 1.71 trillion then—around 29% of what they’ve raised in 2020. With this, investments in G-secs have shot up. 

CRR vs SLR

CRR and SLR are the two ratios. CRR is a cash reserve ratio and SLR is statutory liquidity ratio.

• Under CRR a certain percentage of the total bank deposits has to be kept in the current account with RBI which means banks do not have access to that much amount for any economic activity or commercial activity. 
• Banks can’t lend the money to corporates or individual borrowers, banks can’t use that money for investment purposes. So, that CRR remains in current account and banks don’t earn anything on that.

SLR, statutory liquidity ratio is the amount of money that is invested in certain specified securities predominantly central government and state government securities. 

• Once again this percentage is of the percentage of the total bank deposits available as far as the particular bank is concerned. 
• The SLR, the money goes into investment predominantly in the central government securities as mentioned earlier which means the banks earn some amount of interest on that investment as against CRR where it earns zero.

Note: The important difference between CRR and SLR is that CRR has to be maintained in cash while SLR can be maintained either in cash or in assets that RBI suggests.