Statutory Liquidity Ratio

What is Statutory Liquidity Ratio (SLR)?

Statutory Liquidity Ratio (SLR) is a monetary policy, set by the central bank in order to regulate inflation or increase the growth of the economy. In respect to this policy, Commercial Banks are required to maintain a percentage of total deposit in form of Liquid, Gold or other securities.

The SLR was prescribed by section 24 (A) of Banking Regulation Act, 1949. According to section 24 and section 56 of the banking regulation act 1949, all scheduled commercial banks in India need to maintain the SLR. In any case, if a commercial bank fails to maintain the liquid assets as per SLR rate, RBI levies an annual penalty of 3%. On top of that, if fails to pay penalty, RBI charges a 5% additional penalty.

Components of SLR

Following are the components of SLR:

Liquid Assets
Liquid assets can be easily converted into cash when required. Gold, cash reserves, government bonds, treasury bills and other securities comes under this category. Additionally, it also includes securities that are eligible under market stabilization Schemes and Market Borrowing program.

Net Demand and Time Liabilities (NDTL)
The total sum of deposits which public deposited with the banks is called NDTL. It is a liability to a bank, which they have to pay on demand. Current account, saving account, demand drafts are considered demand deposit. On the other hand, Time deposits such as Fixed deposit do not allow to withdraw amount until maturity.

Objectives of SLR

SLR serves the following purposes:

  • SLR is used by RBI to control the flow of money in the economy
  • Central Bank implements SLR, when there is need to control Inflation or for the growth of the economy.
  • It encourages to invest in government securities.
  • Additionally, commercial banks investing in government securities ensures the solvency of banks over long term or short-term debts.
  • It prevents banks from liquidating their liquid assets when RBI raise CRR.

Impact of Statutory liquidity ratio on Economy

Increasing the SLR
When there is high inflation in the economy, the government increases the SLR rate to decrease the inflation. Increasing the SLR ratio will eventually affect the flow of money in the economy negatively, which will decline the purchasing power of the public and demand for goods and services go down.

Decreasing the SLR
In order to pump liquidity in the economy, Reserve Bank of India (RBI) decreases the SLR rate. There are more liquid funds with banks to lend money to common public. This policy helps government to cause growth in economy.

What is Cash Reserve ratio (CRR)?

Cash reserve ratio or CRR is the minimum percentage of the public deposits specified by the Central bank (RBI), to be maintained in the form of cash by the commercial banks with the Central Bank
CRR is calculated as a percentage of the Net Demand and Time Liabilities (NDTL) of the Bank. NDTL is the proportion amount with the total of savings account, current account and fixed deposits balances. Read More.

Difference Between Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

Cash Reserve Ratio

  • In CRR Policy, Banks Have to maintain reserves only in cash form.

  • Banks do not earn interest on the money deposited.
  • Controls the flow of money in the economy.
  • Reserves are kept with the central bank.

Statutory Liquidity Ratio

  • In SLR policy, Banks requires to maintain deposit with RBI in form of Liquid, Gold or other Securities.
  • Banks Earn interest on the money Deposited.
  • Ensures the Banks credit expansion and solvency issues.
  • Banks keep the reserves with themselves.

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