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Statutory Liquidity Ratio

 Statutory Liquidity Ratio

The Reserve Bank of India uses the Statutory Liquidity Ratio to protect money deposited with banks while simultaneously managing the availability of money in the Indian economy.

What is SLR?

The SLR is the percentage of Net Demand and Time Liabilities (NDTL) that commercial banks must keep in the form of liquid assets. In addition to the CRR that financial institutions must keep with the RBI, banks must maintain a Statutory Liquidity Ratio. In other terms, it refers to the percentage of deposits that banks must hold in cash or other liquid assets to retain their solvency. The ability of a bank to cover its various liabilities is referred to as solvency.

SLR’s objectives

It prevents commercial banks from over-liquidating their assets: When the Cash Reserve Ratio rises, there is no provision for SLR. The RBI established the SLR to maintain control over the bank’s loan limit. In addition, the RBI oversees the SLR rule to retain control over bank loans. Furthermore, SLR helps to ensure that commercial banks invest part of their funds in government securities.

SLR affects the flow of bank credit by increasing or decreasing it: When the Indian economy is ailing due to inflation, the RBI boosts the SLR to keep credit under control. In deflation, the RBI reduces the SLR to encourage bank credit.

SLR’s Components

According to the RBI mandate, the Statutory Liquidity Ratio (SLR) must be maintained in the form of liquid assets. It is considered liquid when a purchase can be easily changed to cash. One of the essential characteristics of such investments is that they are easily transferable from one owner to another. A commercial bank’s SLR can be influenced by the liquid assets listed below:

  • Bills issued by the Treasury
  • Bonds issued by the government
  • Securities that the government has approved
  • Securities issued as a result of Market Borrowing Programs.
  • Market Stabilization Scheme securities were issued.

The SLR calculation formula

The formula for determining SLR is given below. It may appear overly simple, but it is very effective, which is why you should learn it.

 SLR = Net Demand & Time Liabilities as a Percentage (NDTL)

How does it work?

A minimal part of a bank’s Net Demand and Time Liabilities must be in the form of cash, gold, or any other liquid asset. The power of a bank to take money from its accounts is referred to as net demand. On the other hand, Time Liabilities refer to when the bank is required to remain on hold to redeem its liabilities. The statutory liquidity ratio is the bank’s liquid assets proportion to the NDTL. This ratio, along with several other techniques, is critical to ensuring bank stability and the proper flow of money in the Indian economy.

The RBI can determine the Statutory Liquidity Ratio at a maximum of 40% every year. The ability of a bank to infuse money into the Indian economy will be limited as the ratio rises. The RBI can regulate the money supply and maintain price stability for the Indian economy to function properly. The SLR is one of the several monetary policies used by the RBI for this goal.

What effect does SLR have on your investments?

Assuming the RBI has increased the SLR, banks will be required to hold more money in liquid assets, which will lead to a rise in the number of banks looking for government securities to invest in. It becomes more challenging to obtain, demand will increase, and prices will rise. If you wish to invest as an investor, you will now find it a little more challenging to do so. As is the case with everything with high demand, its benefits are now diminishing.

SLR Endurance

The RBI can determine the Statutory Liquidity Ratio at a maximum of 40% every year. SLR has a minimum ratio of 0. However, the current Statutory Liquidity Ratio is kept at 19.25 percent per year. 

The implications of maintaining SLR

SLR must be maintained by all banks in India, including scheduled commercial banks, state cooperative banks, cooperative central banks, and primary cooperative banks, following RBI requirements. 

Every fortnight, every bank must disclose its Net Demand and Time Liabilities (NDTL) to the RBI. And, if they don’t comply, the RBI will charge the bank  a 3 percent annual penalty over the bank rate. Even after that, if the bank fails to do so throughout the working day, a penalty of 5% will be imposed.

Penalties

If a commercial bank fails to maintain the statutory liquidity ratio, it is subject to a penalty of 3% per year above the bank rate.

A defaulter bank is also subject to a penalty of 5% per year above the bank rate if it continues to default on the next working day.

Another rate that the RBI announces in its quarterly review is the bank rate. The primary goal of this bank rate is to assess penalties.

The central bank enforces this restriction on commercial banks for funds to be readily available to clients on demand.

Conclusion

The statutory liquidity ratio is a reserve requirement that commercial banks in India must meet before offering credit to customers in cash or government-approved securities. The Reserve Bank of India determines the Statutory Liquidity Ratio to regulate the increase of bank lending in the Indian economy.