The Statutory Liquidity Ratio, also known as the SLR Rate, refers to the minimum deposits held by commercial banks in terms of gold, liquid cash, and other securities before lending credits to customers. The Central Bank of India, RBI (Reserve Bank of India) is responsible for deciding the SLR rate to be maintain by the commercial banks and reserves all rights to decrease or increase the rates from time to time. Currently, as of April 2022, the SLR is 18%. The purpose of having the Statutory Liquidity Ratio rate determine is to control the country’s credit growth. The Statutory Liquidity Ratiohelps to build transparency between the RBI and the other banks.
How Does SLR Rate Work?
For potential customers, it is important to know how the Statutory Liquidity Ratio works. All banks must possess a certain portion of their Net Demand and Time Liabilities (NDTL) – cash, gold, and liquid assets. The statutory liquidity ratio is the ratio of these assets to the NDTL. The percentage of the Statutory Liquidity Ratio is kept aside for state and central government securities invest in the liquid asset. The Reserve Bank of India can raise the ratio by 40%.
The Statutory Liquidity Ratio is contributory to getting the dissolvability of financial institutions and income. Moreover, an increase in the proportion bolsters the banks’ capacity of boosting cash flow in the economy. It is also the obligation of the RBI to manage the progression of funds to run the economy of India.
The formula used to calculate SLR is as follows:
SLR = {liquid assets / (demand + time liabilities)} x 100%
Importance of Statutory Liquidity Ratio
The SLR rate plays a much-important role in regulating liquidity and inflation. The RBI, by increasing the rate, controls inflation and by decreasing the same, amplifies economic growth. Even though SLR is a monetary policy govern by the Reserve Bank of India, the government deems it crucial to make its debt management programs successful. The SLR rate also helps government to sell its debt instruments and securities to banks using which they can earn an interest income.
When the Statutory Liquidity Ratio is soaring, a financial institution is as confined as far as its influence position. The institution will likely suffer consequences if it fails to keep up with predetermined SLR rate as recommended by RBI.
It’ss mandatory for all commercial banks to submit a report to the RBI on the SLR rate status updates. Thus, the rise in SLR rate will empower banks to deliver more assets to economy and contribute to overall economic improvement.
Objectives of Statutory Liquidity Ratio
The prime objective of Statutory Liquidity Ratio is to stabilize liquidity in banks currently operating in India. Its other objectives include the following:
- Monitoring credit flow and inflation
- Assisting the Reserve Bank of India to guarantee the well-being of a business bank
- Supporting the debt management programs run by the government
- Avoiding liquidation of assets when there is an increase in the CRR (Cash Reserve Ratio)
- Controlling the extension of bank credit since RBI reserves all right to increase or reduce bank credit developments by altering the SLR rates
- Empowering the business banks to put resources under the protection of the government through SLR
Features of SLR
- It is a monetary control instrument in the economy
- The SLR rates are generally maintained and controlled by RBI (Reserve bank of India)
- It is the minimum amount all commercial banks are required to maintain in form of cash, gold, or government securities
Also Read: What is the purpose of the statutory liquidity ratio?
It Is Used For
Bank Credit – If the central bank increases SLR, then all commercial banks must keep more deposits with themselves. This means that they will have less money to lend, so they will lend at a higher rate of interest to maintain their profit margin. On the other hand, a decrease in SLR would lead to banks having more money to spend and therefore, banks would give credit at a lower rate of interest to the general public.
Debt Management of Government – Most banks prefer to keep their SLR in the form of government securities over cash as the former will earn them an interest income. So, if the need arises RBI increases SLR to make banks buy more govt securities and make funds available for the government to manage their debt.
Ensure Solvency of Banks – SLR is increased or decreased to make sure that banks have enough funds available to meet their short, medium, and long-term financial obligations. Thus, this is an important tool of the RBI.
Reduce Inflation – Increased SLR rate means lesser funds available with banks to lend and this means the public has lesser funds and buying capacity. This, in turn, leads to lower demand, leading to a decrease in inflation in the country.
Summary
SLR rate plays a vital role in determining the minimum or base rate at which banks can lend funds to customers. The RBI sets the SLR rate, which is increased to take hold of the bank credit during inflation, and decreased to boost bank credit in times of recession.
