What Is Statutory Liquidity Ratio?
Statutory Liquidity Ratio (SLR) is the least percentage of deposits that a commercial bank keeps with itself in the form of liquid cash, gold, or any other security. Actually, it is reserve cash that banks keep before providing credits to their customers. Just like CRR (Cash Reserve Ratio), SLR is also fixed by the RBI (Reserve Bank Of India). SLR and CRR are the tools of monetary policies of the banks in order to control the flow of liquidity and inflation in the country. In 1949, Banking Regulation Act prescribed SLR.
The current Statutory Liquidity Ratio (SLR) is 18.00% (as of June 2021).
What Is The Importance Of SLR?
SLR is used to keep the balanced flow of liquidity and inflation by the government. If SLR in the economy increases, inflation will be under control. If SLR in the economy decreases, it will cause growth in the economy. In this way, SLR persuades the government to sell its securities and debt instruments to banks. SLR is being kept in the form of government securities by the banks as it will be a source of interest income for them.
SLR Formula
SLR rate = ( liquid assets / ( demand + time liabilities)) x 100%
What Is The Influence Of SLR On The Investor?
When RBI has to decide the base rate, The Statutory Liquidity Rate is considered to be a reference rate. The base rate is thought to be the least lending rate. No bank is permitted to lend anybody below this rate. This rate makes the transparency sure in borrowing and lending in the credit market. RBI ensures while imposing a reserve requirement that deposits are secure and available to be redeemed. However, it makes the bank’s lending capacity tight.
What Is The Importance Of SLR Maintenance?
In India, it is necessary for every bank to maintain the SLR according to the guidelines provided by RBI. Banks are bound to prepare a report about their current NDTL (Net Demand and Time Liabilities) and to provide it to RBI as it is compulsory for computation and maintenance of SLR. Demand liabilities are deposits made by customers and repaid when he asks for it. Time liabilities are deposits that are repaid to customers after passing over a certain period of time.
For example, a customer deposits cash for three months, if he needs it before its maturity, it will not be paid but only after passing three months, this is what we call Time Liability. An example of Demand Liability is a deposit that a customer deposits either in his saving account or current account but when he asks for it, he will be provided.
If any bank does not succeed to maintain this SLR, RBI will impose a penalty of 3% per annum according to the bank rate. If the bank fails to do so on the next working day the rate of the penalty goes to 5% per annum over the bank rate. This ensures that the bank has ready cash and makes it available when a customer needs it as soon as possible.