Statutory Liquidity Ratio (SLR Rate) is the essential reserves requirement expected from banks before giving customers credits. It is a minimum percentage that commercial banks have to adhere to in terms of cash, gold, or security.
The Reserve Bank of India (RBI) does not keep these reserves, but they ask the bank to maintain them. The RBI fixes the SLR. It is a form to control credit growth in India. A Statutory Liquidity Ratio is mandatory for commercial banks. It plays a significant role in deciding the minimum lending rate of banks at which the latter can offer credit to their customers. SLR rate helps build transparency between the banks and the RBI.
Knowing what SLR is crucial to understanding how it works. Let us take a look at its functionality.
Banks must keep a portion of Net Demand and Time Liabilities (NDTL), ie, liquid assets, cash and gold. The ratio of these liquid assets to the demand and time liabilities is the statutory liquidity ratio.
This percentage is kept aside for central or state government-approved securities which invest in liquid assets. The RBI has the right to increase this ratio by 40%.
SLB is one of its few financial approaches for something similar. SLR (among different apparatuses) is instrumental in getting the dissolvability of the banks and income in the economy. Additionally, a lift in the proportion tightens the capacity of the bank to boost cash into the economy. RBI is additionally obligated for managing the progression of money and the soundness of costs to run the Indian economy.
The SLR is a money-related approach method of the RBI; the public authority should make its obligation to the executive’s programme compelling. SLR has assisted the public authorities with offering its protections or obligation approach to banks.
The public authority utilises the SLR for direct expansion and liquidity. Expanding the SLR will control growth in the economy while diminishing it will cause development. The majority of the banks will keep their SLR as government protection to procure them a premium pay.
The most elevated restriction of SLR in India was 40%. Then again, the base furthest reaches of SLR is 0. As of 10th April 2022, the RBI-approved SLR rate in India is 18%.
When there is an ascent in the SLR, a bank is likewise confined as far as its influence position. If any bank has not been effective in keeping up with the predetermined SLR (as recommended by the RBI), the bank will be expected to suffer specific consequences.
All banks should obligatorily give a report or an update to the Reserve Bank of India each substitute Friday regarding their SLR status. Thus, this ascent in the SLR will empower a bank to deliver more assets to the economy and contribute to general economic improvement.
The main objective of the SLR rate is to stabilise liquidity in banking institutions presently operating in India.
The two main SLR components are as follows:
This is the complete mutual peace between demands and time deposits of the public that a bank holds. Liabilities that a bank should pay on request, containing current and investment accounts and request drafts, are demand deposits.
Demand deposits are considered as all liabilities that the bank should pay. Late fixed deposits, demand drafts, current deposits and demand liabilities are some examples that are considered part of investment savings bank deposits.
The assets that get converted into cash easily in one or two days are known as liquid assets. These include government bonds, marketable securities, treasury bills, gold, and other cash equivalents. They even consider eligible securities procured through specific, RBI approved securities in a few cases.
The percentage of total demand and time liabilities of the bank is called SLR. Deposits of customers paid to them on demand at any time are called demand liabilities. There is a period mutually agreed upon after which commercial banks are liable to pay customers; that amount is called time liabilities.
The formula for calculating SLR is:
SLR = % of net demand & time liabilities (NDTL)
SLR is fixed to keep a tap on the expansion of the bank’s credit. It ensures that bankS invest in government securities like bonds, and it makes sure that commercial banks get into solvency.
The RBI is liable to pay a penalty of 3% above the bank rate on the low amount for that particular day if they fail to maintain the prescribed SLR. The RBI is the one that decides the percentage of SLR, and it only increases and decreases its rate. At the time of inflation, it expands, and it expands at the time of recession.
RBI monetary policy consists of two components: CRR and SLR. SLR is the statutory liquid ratio, and CRR is the cash reserve ratio. SLR is the percentage ratio of the deposits such as gold, security bonds, PSU bonds, and many more in liquid assets.
As of April 2022, the rates of both are as given below:
The primary differences between CRR and SLR are:
The current SLR rate is 18%. The RBI reserves all rights to increase or decrease the present SLR rate.
In India, the base rate alludes to the RBI-fixed base rate. The base rate, likewise, helps verify that banks offer low costs of funds to any of their clients, and it helps limit advance costs for all borrowers. This is the rate under which no bank can loan funds to borrowers, and this is not entirely settled to ensure transparency when banks lend funds to people in the credit market.
The statutory liquidity ratio assumes an exceptionally prominent part in fixing the base rate of the Indian economy.
The RBI additionally investigates how banks screen their accessibility of funds for tolerating deposits from customers and forgiving them as credits to customers.
The statutory liquidity ratio is routinely observed so that banks have a more substantial influence and a superior affecting viewpoint. Hence, the SLR plays a part in deciding the country’s base rate. The public authorities and the RBI cooperate to adjust the SLR. The base rate is not entirely analysed by the statutory liquidity ratio, cash reserve ratio, cost of borrowings, upward expenses, overhead deposits, etc.
Consequently, it is concocting an ever-increasing number of procedures and methods that can be applied practically to ensure that banks have adequate funds in their safe for prepared credit. Before this, banks used to try not to have any passive funds in their branches and subsequently, when there was an abrupt and pressing necessity for credit or some other type of funds, they fizzled as a moneylender.
However, the RBI makes it compulsory for banks to keep a specific funds ratio with the country’s central bank. The RBI additionally believes banks should be highly cautious with the advances given by the public authorities.
The SLR ratio is viewed as one of the reference rates when RBI decides the base rate. The base rate is the base lending rate, and no bank can loan beneath this base rate. Similarly, this rate is fixed to guarantee transparency in borrowing and lending in the credit market.
At times, the RBI reduces the SLR of the banks in the country. There are several reasons for the reduction in SLR:
All banks must maintain the SLR. Every fortnight(Friday), banks have to report their latest net demand and time liabilities. It is mandatory for all banks in the country to maintain the SLR as it helps boost the economy and expand credit.
If any financial institution fails to maintain the SLR, the RBI charges them a 3% penalty annually on top of the bank rate. If they fail to retain it the next working day, a 5% penalty is charged. This ensures that banks do not fall behind in keeping cash when customers need it.
An astonishing direct financial instrument has helped the Indian government sell its obligation instruments and protections to banks every now and then. You will wonder how the SLR helps upgrade the economy and it has advanced and elevated the obligation of the board program of the public authority. The programme is intended to assist in saving money by offering top of the line loans to all areas of the country.
The primary justification for laying the SLR by the RBI is to be more cautious. In any monetary action, it is vital to be mindful and watchful. Any bank in the country works with a chief rule to gather deposits from general society and afterwards assurance to offer clients with funds at standard or more. Be that as it may, this is a highly hazardous movement for each bank.
To safeguard each bank’s risk and lessen its risk rate, the RBI makes it mandatory that each bank conveys a portion of its funds with the RBI so that its funds are protected in possession of the most responsible entity as the safest assets.
In a nutshell, the statutory liquidity ratio is crucial to boosting the overall economy in the global market. This rate is slashed or increased by the RBI only, and banks do not have any control over it.
The banks need to maintain these rates to work with complete transparency. All commercial banks are obligated to retain this rate in the form of liquid assets such as gold, bonds, cash and many more for the customer’s benefit. SLR is mandatory for each bank to maintain credit and fuel growth in the economy.
The government also helps control inflation by reducing the statutory rate and increasing it during a recession. The RBI reserves SLR deposits and banks do not have control over it. Failing to maintain the SLR rate can result in penalty charges annually to the bank, and repeated failure can result in many more consequences. RBI gives all banks and their staff equal opportunities to initiate new programmes and work towards the smooth operations of their respective branches.
For many banks who operate lethargically during a specific period, the RBI pumps them to work in a better way by reducing SLR rates. Therefore, SLR is for the benefit of the financial and economic growth of the country, and every bank must abide by its rules.
The statutory liquidity ratio is crucial to maintaining liquidity by the banks. The RBI reserves this rate and helps to boost the economy through financial bodies. The SLR helps keep the credit low in the credit flow in the country and controls inflation.
The SLR is important to maintain the base rate, which helps the lenders of India to lend money to their customers. As the RBI decides the SLR rates, it is essential to maintain transparency between the RBI and other banks in India.
The RBI decides the SLR rate and reserves all rights to increase and decrease it. The current SLR rate is 18.00% as of April 2022.The RBI decides the SLR rate and reserves all rights to increase and decrease it. The current SLR rate is 18.00% as of April 2022.
SLR is the percentage of the time liabilities and net assets that every lender must maintain at the end of each working day. The Reserve Bank of India decides SLR, and its formula is:
SLR = (liquid assets / (demand + time liabilities)) * 100%
SLR can not only be cash but in the form of other liquid assets too, like gold, government bonds and approved securities.