Statutory Liquid Ratio (SLR) is defined as the ratio of liquid assets to net demand and time liabilities. It is the minimum percentage of deposits maintained in the form of gold, cash, liquid assets and other securities by commercial banks. While all banks are required to keep this as a reserve before offering credit to borrowers, it is the Reserve Bank of India (RBI) that determines the Statutory Liquid Ratio rate.
The Statutory Liquid Ratio plays a vital role in regulating liquidity and inflation. An increase in the ratio will control inflation while a decrease in it will boost economic growth. The RBI is authorized to raise SLR to 40%, which in turn, constricts the bank’s ability to inject money into the economy. At present, the SLR rate is fixed at 18% for banking institutions, and 15% for non-banking financial companies (NBFCs).
The RBI charges a penalty of 3% annually on the bank rate if asset liquidity as per SLR is not maintained. Default on this penalty will further result in an additional 5% fine the very next day. This is to ensure that borrowers have access to liquidity whenever required.
What Are the Various Components?
Under Sections 56 and 24(2A) of the Banking Act, 1949, the Statutory Liquid Ratio is composition of two main components. These are:
Liquid Assets
By liquid assets, we refer to any asset that can be liquidate easily by financial institutions. For instance, cash, gold, government bonds etc. Sometimes, these also include eligible securities availed through RBI-sanctioned securities.
Net Demand and Time Liabilities (NDTL)
NDTL refers to the accumulation of fixed deposits, savings and current account balances reserved by financial institutions. Put simply, it is the sum of time, demand and other liabilities, minus the deposits. The financial institution has to maintain the present SLR in the form of liquid securities depending on the total amount.
How Does SLR Function?
The SLR controls inflation and credit growth in the Indian economy. With an increase in Statutory Liquid Ratio, institutions lend less so there is less liquidity and upward pressure on inflation. It also determines the number of liquid assets that financial institutions must keep to meet the depositors’ needs, as and when required. SLR also functions as a monetary tool that encourages investing in government securities and debt instruments from financial institutions.
Here’s an example – A person deposits Rs.1000 in a bank. The bank has to keep a certain percentage of it, say 30% as SLR with the RBI. Thus, at a prevailing rate of 30%, the bank will have to invest (30/100*1000) = Rs.300 in government securities.
Besides, the Statutory Liquid Ratio also affects other aspects of the economy. It is determine the base rate for loans. On the other hand, if SLR drops, lending institutions offer lower interest rates.
What Are the Objectives of the Statutory Liquid Ratio Rate?
The main objectives of the Statutory Liquid Ratio rate are as follows:
- Control inflation and credit flow
- Promote investment in various government securities
- Ensure solvency in all financial institutions
- Prevent the liquidation of assets when Cash Reserve Ratio (CRR) is raise
- Assist debt management programme by the government
- To fuel growth and demand – when Statutory Liquid Ratio decreases with an increase in the liquidity
What Are Some Assets for the Statutory Liquid Ratio?
Some of the liquid assets held by financial institutions are:
- Gold
- Cash
- Treasury bills
- Government securities
- Government bonds
- State development loans
- Govt. securities issued under the market stabilization scheme
- Other sanctioned securities
How to Calculate Statutory Liquid Ratio
Statutory Liquid Ratio or SLR is calculate using a simple formula:
SLR = {Liquid Asset/ (Demand + Time Liabilities)}*100
Statutory Liquid Ratio: Highlights
Listed below are some of the most notable features of Statutory Liquid Ratio:
- All reserves are keep in the form of liquid assets
- Regulates credit expansion
- Liquid assets maintained by financial institutions
- Interest earned on parked assets with sanctioned securities
A clear understanding of the Statutory Liquid Ratio gives you an insight into the various aspects of our economy. With all the information in place, you can make an informed decision.
