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The Reserve Bank of India maintains various instruments within its monetary policy to administer the Indian economy. It influences the prices of commodities, regulation of cash flow or money supply and many other factors of an economy.
Statutory liquidity ratio (SLR) is one of those financial instruments of RBI to maintain the solvency of banks. Read further to learn more about SLR.
The meaning of statutory liquidity ratio is a mandatory reserve requirement that Indian commercial banks must maintain. They must maintain it through liquid assets like cash, gold, bonds, PSU and RBI approved securities.
RBI Act mandates commercial banks to maintain a percentage of their net demand and time liabilities (NDTL) as SLR. RBI determines this percentage of SLR to control the expansion of a commercial bank.
A change in this ratio controls the ability of a financial institution to inject money into our economy. Therefore, RBI increases it in the time of inflation to restrict banks and NBFCs from providing loans.
Statutory Liquidity Ratio comprises 2 components as follows -
Assets that are readily convertible into cash are called liquid assets. Gold, cash reserves, government bonds, treasury bills, and RBI approved securities fall under this category. Besides, these include eligible securities under Market Stabilisation Schemes and Market Borrowing Programmes.
This is the aggregate balance of demand and time deposits of the public that a bank holds. Demand deposits are liabilities that a bank must pay on demand, comprising current and savings accounts, demand drafts etc. In contrast, time liabilities such as fixed deposits do not allow you to withdraw deposits immediately. These have a maturity period before which you cannot access the deposit.
RBI fulfils the following objectives through the statutory liquidity ratio in India.
Following are the institutions that RBI obligates to maintain a statutory liquidity ratio.
RBI levies an annual penalty of 3% over the bank rate for not maintaining liquid assets as SLR. Additionally, RBI charges a 5% fine if the bank fails to pay the penalty on the following working day.
RBI uses SLR as a reference rate to determine the base rate, which is the minimum lending rate. No bank can lend money below this rate to the public. It is fixed to ensure clarity regarding lending and borrowing in the credit market.
The reserve requirement of RBI restricts banks’ lending capacity. Therefore, banks usually increase their lending rate to control the demand.
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Statutory Liquidity Ratio |
Cash Reserve Ratio |
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Banks are required to reserve liquid assets, which include cash, gold and government bonds as SLR. |
Banks need to have only cash reserves with the Reserve Bank of India to maintain CRR. |
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Financial institutions earn returns on assets parked as SLR. |
In contrast, financial institutions do not earn returns on cash parked as CRR |
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SLR works as a tool to control the credit expansion of a bank. |
Whereas, RBI uses CRR as a tool for controlling liquidity in banks. |
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Banks need to maintain the liquid assets by themselves. |
On the other hand, banks must maintain CRR with the Reserve bank. |
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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