What is SLR?
The Statutory Liquidity Ratio or SLR refer to a requirement that a bank maintains a minimum percentage of its deposits in liquid assets, such as cash, gold, and other securities. Generally, this is the minimum reserve banks are required to hold before they can extend credit to their customers. In India, the RBI determines the statutory liquidity ratio.
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If an Indian bank fails to keep the statutory liquidity ratio at the required level, it faces a penalty from the Reserve Bank of India. On the deficit amount on that particular day, the defaulter bank pays penal interest at a rate of 3% per annum above the bank rate. If the defaulter bank continues to default on the next working day, the rate of penal interest can be increased to 5% per annum over the bank rate. The Reserve Bank of India’s Department of Banking Operations and Development has issued a public circular in this regard.
How to Calculate SLR?
SLR = (liquid assets / (demand + time liabilities)) * 100%.
Let’s examine ABC Bank as an example. The bank possesses $20 million in liquid assets. The bank has Rs200 million in NTDLs (net time and demand liabilities). Help ABC Bank’s management in calculating the statutory liquidity ratio.
Statutory liquidity Ratio = LA / NTDL = (Rs 40,000,000 / Rs 400,000,000)*100
Statutory liquidity Ratio = 10%.
As a result, the bank’ SLR is 10%.
What is the Current SLR Rate?
According to the Reserve Bank of India’s Monetary policy, the SLR rate is at 18%.
Objectives of Statutory Liquidity Ratio
- Assuring the financial stability of commercial banks by supporting the RBI.
- To empower the expansion of Bank Credit. By changing the SLR rates, the Reserve Bank of India can encourage or discourage the growth in interest rates on its long-term lending programs.
- By implementing SLR, the central bank obliges commercial banks to purchase or invest in government securities.
- The aim is to control the amount of money supply in the Economy.
- SLR helps in guiding the financial policy for the economy.
- Moreover, it helps in ensuring solvency in the financial institutions.
- In case of a hike in cash reserve ratio (CRR), statutory liquidity ratio (SLR) will prevent asset liquidation
How Does Statutory Liquidity Ratio Work?
It is imperative for all banks to maintain some portion or percentage of their Net Demand and Time Liabilities (NDTL) in cash, gold, or another liquid asset by the end of the day. In legal terms, the Statutory Liquidity Ratio (SLR) represents this ratio of liquid assets to demand and time liabilities. Several RBI governors have indicated that the Reserve Bank of India (RBI) has the power to increase this ratio by as much as 40%.
An increase in the ratio constricts the capabilities of the commercial banks to inject money into the economy. The Reserve Bank of India is somewhere or the other also in charge of channeling the movement of money and maintaining price stability in the Indian economy. One of the numerous financial approaches for the same is the Statutory Liquidity Ratio. Further, it is critical for ensuring bank stability and cash flow in the economy, among other concerns.
Components of Statutory Liquidity Ratio
Based on sections 24 and 56 of the Banking Regulation Act 1949, all commercial banks, local district banks, primary co-operative banks, state banks as well as central banks have to maintain Statutory Liquidity Ratio, that’s why it’s necessary to know about the components of the SLR, which are listed below.
Net Demand and Time Liabilities (NDTL)
The total demand and time liabilities (deposits) of the public held by banks with other banks are addressed as NDTL. All liabilities that the bank must pay on demand are included in demand deposits. Current deposits, demand draughts, overdue fixed deposit amounts, and the demand liabilities part of savings bank deposits are all examples.
All deposits are to be repaid at maturity because of which the depositor won’t be able to take the money out immediately. Consequently, the investor is not allowed to have access to the fund until the maturity period has ended.
Liquid assets are those assets that the bank convert into cash very easily in 1-2 days. These assets also include gold, cash equivalents, treasury bills, government bonds, govt-approved securities, and marketable securities.
What is Cash Reserve Ratio?
A certain proportion or share the bank needs to maintain in form of a cash-out of their total deposit is termed as Cash Reserve Ratio (CRR). CRR is being regulated by the Reserve bank of India and the reserve is either being stored in the bank’s vault or is being sent to the RBI. The share is being maintained so that the amount is immediately available to the customers when they want their deposit back.
If the current CRR rate is 4%, a bank must keep 4% of its total Net Demand and Time Liabilities (NDTL) in cash. This money cannot be used for investment or lending by the bank.
explore our article on What is Liquidity Trap?
Difference between CRR and SLR
|Cash Reserve Ratio||Statutory Liquidity Ratio|
|CRR helps the commercial banks to meet the requirement of the depositors||SLR helps commercial banks track the movement of cash in the nation.|
|CRR doesn’t have any interest policy on cash reserves which they maintain for customers.||SLR standards help the commercial banks to earn interest on liquid deposits which are held by central banks|
|In CRR, banks are only asked to maintain a reserve in cash with the RBI||In SLR, banks are allowed to have a reserve of liquid assets which include both gold and cash|
|Reserve is supposed to maintain with the Reserve Bank of India||Securities are kept with the bank themselves in case of SLR.|
|CRR regulates liquidity in the nation||SLR regulates credit growth in the nation|
|CRR rates stand at 4.00%||SLR rate stands at 18.00%|
Frequently Asked Questions
As per the Reserve Bank of India (RBI), the current SLR ratio is 18% (as on February 2022).
No, SLR and CRR are not the same. They both have different purposes. SLR is a certain percentage of liquid assets such as cash, gold or other securities to time and demand liabilities. This ensures the solvency of banks. On the other hand, CRR is a certain percentage of money that the bank has to maintain with RBI in the form of cash. This regulates the flow of money in the economy.
The current rates as per RBI Monetary Policy -SLR rate is 18%, and CRR rate is 4%.
The Reserve Bank of India (RBI) decides the percentage of SLR at the central level.
The SLR ratio is considered one of the reference rates when RBI determines the base rate. The base rate is the minimum lending rate. No bank can lend below this base rate. Therefore, this rate is fixed to ensure transparency in borrowing and lending in the credit market.