Module: | MODULE C: TREASURY MANAGEMENT
Q485: Consider the following statements regarding the maintenance constraints and valuation shields of the Statutory Liquidity Ratio:
1. The Statutory Liquidity Ratio requires banks to maintain a minimum percentage of their NDTL in the form of highly liquid, unencumbered approved assets, as mandated by Section 24 of the Banking Regulation Act, 1949.
2. Unlike the Cash Reserve Ratio, which has no legislative cap, the RBI is strictly legally restricted by the Banking Regulation Act from prescribing a Statutory Liquidity Ratio exceeding 40% of a bank's total NDTL.
3. Securities acquired by a bank under the Liquidity Adjustment Facility reverse repo operations cannot be classified or counted as eligible assets for fulfilling Statutory Liquidity Ratio requirements.
4. Banks are strategically permitted to maintain their required Statutory Liquidity Ratio portfolio in the Held to Maturity category, which effectively protects them from Mark-to-Market valuation losses.
2. Unlike the Cash Reserve Ratio, which has no legislative cap, the RBI is strictly legally restricted by the Banking Regulation Act from prescribing a Statutory Liquidity Ratio exceeding 40% of a bank's total NDTL.
3. Securities acquired by a bank under the Liquidity Adjustment Facility reverse repo operations cannot be classified or counted as eligible assets for fulfilling Statutory Liquidity Ratio requirements.
4. Banks are strategically permitted to maintain their required Statutory Liquidity Ratio portfolio in the Held to Maturity category, which effectively protects them from Mark-to-Market valuation losses.
✅ Correct Answer: C
The Statutory Liquidity Ratio (SLR) is governed by Section 24 of the Banking Regulation Act, 1949.
It requires banks to invest a portion of their Net Demand and Time Liabilities (calculated with a lag based on the last Friday of the second preceding fortnight) into designated safe assets, primarily Central and State Government securities, gold, or pure cash.
While the RBI Act was amended to remove CRR limits, the Banking Regulation Act still enforces a strict legislative ceiling on SLR; the RBI legally cannot mandate an SLR requirement exceeding 40% of a bank's NDTL.
A critical operational rule dictates that government securities temporarily acquired by a bank from the RBI through Reverse Repo operations under the LAF window are completely ineligible to be counted toward the bank's SLR maintenance, ensuring no artificial inflation of statutory buffers.
Because SLR investments are a regulatory mandate rather than a speculative trading decision, the RBI allows banks to classify this specific portfolio under the "Held to Maturity" (HTM) accounting category.
This is a massive strategic advantage, as HTM assets are entirely shielded from daily Mark-to-Market (MTM) accounting; even if market interest rates spike and bond prices crash, the bank does not have to book immediate valuation losses on its SLR portfolio.
A: This option incorrectly excludes statement 2. The absolute 40% legislative ceiling on SLR, contrasting directly with the uncapped CRR, is a fundamental statutory constraint.
B: This option incorrectly excludes statement 1. The definition of SLR as a mandate for unencumbered approved assets under Section 24 of the BR Act is the foundational legal basis of the ratio.
C: This is the correct option.
All four statements accurately encompass the BR Act mandates, the 40% legislative cap, the Reverse Repo exclusion rule, and the HTM valuation shield.
D: This option incorrectly isolates statements 1 and 2, completely ignoring the operational nuance of Reverse Repo exclusions and the accounting protection offered by the HTM classification.
It requires banks to invest a portion of their Net Demand and Time Liabilities (calculated with a lag based on the last Friday of the second preceding fortnight) into designated safe assets, primarily Central and State Government securities, gold, or pure cash.
While the RBI Act was amended to remove CRR limits, the Banking Regulation Act still enforces a strict legislative ceiling on SLR; the RBI legally cannot mandate an SLR requirement exceeding 40% of a bank's NDTL.
A critical operational rule dictates that government securities temporarily acquired by a bank from the RBI through Reverse Repo operations under the LAF window are completely ineligible to be counted toward the bank's SLR maintenance, ensuring no artificial inflation of statutory buffers.
Because SLR investments are a regulatory mandate rather than a speculative trading decision, the RBI allows banks to classify this specific portfolio under the "Held to Maturity" (HTM) accounting category.
This is a massive strategic advantage, as HTM assets are entirely shielded from daily Mark-to-Market (MTM) accounting; even if market interest rates spike and bond prices crash, the bank does not have to book immediate valuation losses on its SLR portfolio.
A: This option incorrectly excludes statement 2. The absolute 40% legislative ceiling on SLR, contrasting directly with the uncapped CRR, is a fundamental statutory constraint.
B: This option incorrectly excludes statement 1. The definition of SLR as a mandate for unencumbered approved assets under Section 24 of the BR Act is the foundational legal basis of the ratio.
C: This is the correct option.
All four statements accurately encompass the BR Act mandates, the 40% legislative cap, the Reverse Repo exclusion rule, and the HTM valuation shield.
D: This option incorrectly isolates statements 1 and 2, completely ignoring the operational nuance of Reverse Repo exclusions and the accounting protection offered by the HTM classification.