SLR full form is statutory liquidity ratio. In Indian banking terms, the statutory liquidity ratio (SLR) refers to the minimum reserve requirement that needs to be maintained by commercial banks in the nation. So This term is used by the Indian government. Thereby SLR or statutory liquidity ratio is the minimum percentage of deposits that a bank has to maintain in form of gold, cash, or other approved securities.
SLR का फुल फॉर्म वैधानिक तरलता अनुपात है। भारतीय बैंकिंग शब्दों में, वैधानिक तरलता अनुपात (एसएलआर) न्यूनतम आरक्षित आवश्यकता को संदर्भित करता है जिसे राष्ट्र में वाणिज्यिक बैंकों द्वारा बनाए रखने की आवश्यकता होती है। तो यह शब्द भारत सरकार द्वारा प्रयोग किया जाता है। इस प्रकार एसएलआर या वैधानिक तरलता अनुपात जमा का न्यूनतम प्रतिशत है जिसे बैंक को सोने, नकद या अन्य अनुमोदित प्रतिभूतियों के रूप में बनाए रखना होता है।
History of SLR
The RBI first imposed SLR on banks in 1949, two years after independence. In 1949, the SLR rate was 20%. So Since its introduction to the Indian banking system, the SLR rate has been going up and down. The highest SLR rate ever recorded is 38.5%, and this was noticed in 1990 and 1992. The SLR rate cannot be more than 40% whatsoever, as set by the Reserve Bank of India (RBI). So Till 29th March 1985, all banks had to maintain SLR as an ordained proportion of gross DTL happening every Friday.
How does Statutory Liquidity Ratio work
Every bank must have a particular portion of their Net Demand and Time Liabilities (NDTL) in the form of cash, gold, or other liquid assets by the end of the day. So The ratio of these liquid assets to the demand and time liabilities is called the Statutory Liquidity Ratio (SLR). Thereby The Reserve Bank of India (RBI) has the authority to increase this ratio by up to 40%.
So An increase in the ratio constricts the ability of the bank to inject money into the economy. RBI is also responsible for regulating the flow of money and the stability of prices to run the Indian economy. So Statutory Liquidity Ratio is one of its many monetary policies for the same. Thereby SLR (among other tools) is instrumental in ensuring the solvency of the banks and cash flow in the economy.
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The Statutory Liquidity Ratio is used to regulate the credit growth of the country. So This ratio was brought into the banking system to regulate liquidity and inflation. Thereby If banks increase their SLR, the situation will lead to inflation, while decreasing SLR will yield great economic results. So In other words, if the SLR rate is high, the home loan interest rate will hike.
Impact of SLR on the Investor
The Statutory Liquidity Ratio acts as one of the reference rates when RBI has to determine the base rate. Thereby base rate can be considered as the minimum lending rate. So No bank can lend anybody below this rate. Thereby This rate is fixed to ensure transparency concerning borrowing and lending in the credit market.
So The Base Rate also helps the banks to cut down on their cost of lending to be able to extend affordable loans. Thereby When RBI imposes a reserve requirement, it ensures that a particular portion of the deposits are safe and are always available for customers to redeem. So, However, this condition also restricts the bank’s lending capacity. Thereby To keep the demand in control, the bank will have to increase its lending rates.
statutory liquidity ratio Advantage
The primary objective of the SLR rate is to maintain liquidity in financial institutions operating in the country. So Besides this, the SLR rate also helps: Control credit flow and inflation. Promote investment in government securities.
What happens if SLR is not maintained
In India, every bank such as a scheduled commercial bank, state cooperative bank, cooperative central banks, and primary cooperative banks – is required to maintain the SLR as per the RBI guidelines. So For computation and maintenance of SLR, banks have to report their latest net demand and time liabilities to RBI every fortnight (Friday). If any commercial bank fails to maintain the SLR, RBI will levy a 3% penalty annually over the bank rate. Defaulting on the next working day too will lead to a 5% fine. Thereby This will ensure that commercial banks do not fail to have ready cash available when customers demand them.
Components of Statutory Liquidity Ratio
Section 24 and Section 56 of the Banking Regulation Act 1949 mandates all scheduled commercial banks, local area banks, Primary (Urban) co-operative banks (UCBs), state co-operative banks, and central co-operative banks in India to maintain the SLR.
What is SLR in the Indian economy?
FAQS-Frequently Asked Question
The Statutory Liquidity Ratio is a monetary policy instrument of the RBI. Under SLR, commercial banks have to keep a certain proportion of the demand and time deposits as liquid assets in their own vault. Any other instrument may be notified by the Reserve Bank of India.
What is an SLR example?
Example. Let SLR is 20% then the bank has to keep INR 20 from the deposit of INR 100, that means if the bank has a deposit of INR 200 Million then the bank have to keep 40 Million i.e. 20% of the total 200 Million and a bank can use rest 160 Million for banking purpose.
Which banks maintain SLR?
In India, every bank such as a scheduled commercial bank, state cooperative bank, cooperative central banks, and primary cooperative banks – is required to maintain the SLR as per the RBI guidelines.
Why do banks maintain SLR?
The government uses the SLR to regulate inflation and liquidity. Increasing the SLR will control inflation in the economy while decreasing it will cause growth in the economy. Although the SLR is a monetary policy instrument of RBI, it is important for the government to make its debt management program successful.