Introduction to SLR: The Statutory Liquidity Ratio is like a savings rule for banks in India. It’s a certain amount of money, a percentage of the deposits they receive, that banks must keep aside. This money can be in the form of gold, cash, or other types of safe investments. The Reserve Bank of India (RBI), which is like the boss of all banks in India, uses SLR as one way to control how much money banks can lend and how much they can take in deposits.
Understanding terms like SLR, CRR, OMO, and others is important if you’re studying the Indian Economy for exams like the UPSC Civil Services Examination (CSE). In this article, we’ll focus on SLR and what it means for banks and the economy.
The Statutory Liquidity Ratio (SLR) is a tool used by the central bank, RBI, to control liquidity in the economy. It requires commercial banks to set aside a portion of their Net Time and Demand Liabilities (NTDL) in the form of approved assets such as gold, cash, government securities, or other RBI-approved securities. Banks usually invest in government securities to meet SLR requirements and earn interest.
Unlike the Cash Reserve Ratio (CRR), each commercial bank keeps its SLR in its vault. The specific percentage of SLR is determined by the Reserve Bank of India and changes based on economic conditions. As of 08 June 2023, the RBI has set the SLR at 18%, meaning that all banks must hold 18% of their Net Time and Demand Liabilities in approved assets.
The reason behind adhering to the Statutory Liquidity Ratio (SLR) is as follows:
Section 24 and Section 56 of the Banking Regulation Act 1949 require various banks in India to uphold the Statutory Liquidity Ratio (SLR). This encompasses scheduled commercial banks, local area banks, Primary (Urban) co-operative banks (UCBs), state co-operative banks, and central co-operative banks.
Components of SLR include:
To prevent excessive liquidation by commercial banks:
To regulate the flow of bank credit:
Below are listed some of the major differences between the two types of reserve ratios, namely SLR and CRR.
SLR | CRR |
SLR stands for Statutory Liquidity Ratio. | CRR stands for Cash Reserve Ratio. |
It is the percentage of Net Time and Demand Liability that a bank has to maintain in their vault. | It is the percentage of Net Time and Demand Liability that a bank has to maintain with the Reserve Bank of India. |
Comparatively SLR is less effective in controlling liquidity. | Comparatively CRR is a more effective and useful credit control tool of RBI. |
Banks earn interest from the money maintained as SLR (When deposited in government securities and bond) | Banks do not earn any such interest from the money maintained as CRR. |
It is used to control the expansion of bank credit. | It is used to control the liquidity in the banking system. |
The bank rate is the interest rate set by a central bank for lending to commercial banks. When commercial banks face a shortage of funds, they can borrow money from the central bank of the country. In India, this central bank is the Reserve Bank of India (RBI). The lending process operates according to the monetary policy of the country. Essentially, the bank rate represents the rate at which the RBI provides loans to commercial banks without requiring any security.
SLR i.e Statutory Liquidity Ratio is the minimum percentage of Net Time and Demand Liability (NTDL) that a commercial bank is required to maintain in their vault. The SLR can be maintained in the form of cash, gold, government securities or any other securities approved by the Reserve Bank of India.
SLR refers to the proportion of Net Time and Demand Liability (NTDL) which a commercial bank maintains in liquidity form with itself, whereas the CRR refers to the proportion of Net Time and Demand Liability which a commercial bank maintains with the Reserve bank of India. Though both CRR and SLR are credit control tools. CRR is more effective and useful when compared to SLR.
The SLR is an essential instrument in the RBI's monetary policy that helps regulate the cash flow in the economy and ensures the bank's stability. The current SLR rate, as of 08 June 2023, is 18%, however, the RBI has the authority to raise it to 40%.
The SLR is fixed by the Reserve Bank of India. Being the central bank of the country, it is the function of RBI to maintain control over the lending and deposit creating capacity of the banks. It employs several quantitative and qualitative measures to achieve it.
Statutory Liquidity Ratio (SLR) is maintained by the commercial banks in order to ensure the solvency of commercial banks, to prevent them from over-liquidating, to maintain the bank credit during the inflation and recession by increasing and decreasing the SLR respectively.
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