SLR or Statutory Liquidity Ratio is the minimum percentage of deposits the commercial banks have to keep to themselves in the form of liquid cash in addition to CRR (Cash Reserve Ratio). Liquid cash means anything that can be converted to cash immediately. It includes money, gold, dated securities, treasury bills, etc. as specified by the Reserve Bank of India.
The Reserve Bank of India determines the percentage of NDTL to be kept in the form of SLR. It may change the rate of SLR from time to time. However, the banks get an interest on the SLR. At the same time, the Reserve Bank of India penalizes the banks if they don’t maintain the required percentage of SLR.
The Reserve Bank of India implements SLR to control the bank credit, ensure the banks’ solvency, and pressurize banks to invest in government securities.
SLR (Statutory Liquidity Ratio)
The Reserve Bank of India monitors the bank credit and money supply in an economy. Once the banks have enough money to lend at a lower interest rate, people take loans, and the money supply increases. It results in inflation. Therefore, the Reserve Bank of India raises the SLR rate. It compels the banks to keep aside a higher percentage of the money in the form of SLR.
On the other hand, during a recession or a slow economic growth, the Reserve Bank of India lowers the SLR rate so that the banks can keep aside a lower percentage of their deposited money in the form of SLR. It enables banks to disburse loans at a much cheaper rate. As a result, the money supply increases, and it boosts the economy.
Let’s see it with an example.
Suppose the NDTL a bank is Rs 100 crore at the end of the day, and SLR is 18.00%, then the bank has to keep aside Rs 18 crore in liquid assets like gold, cash, or other liquid assets.
Let’s compare the two scenarios.
XYZ bank has Rs 100 crore as NDTL at the end of a particular day, and the rate of SLR is 18.00%.
That means the bank has to keep Rs 18 crore in liquid assets like cash, gold, etc. As a result, it is left with only Rs 82 crores to disburse as loans.
XYZ bank has Rs 100 crore as NDTL at the end of a particular day, and the rate of SLR is 36.00%.
That means the bank has to keep Rs 36 crores in liquid assets like cash, gold, etc. As a result, it has only Rs 64 crores ready to be disbursed as loans.
|Date||NDTL (In Crores)||SLR Rate||SLR Amount (In Crores)||Remaing Amount in the Bank (In Crores)||Money Supply in the economy|
A lesser amount of money left by banks means higher interest rates for borrowers. Thus, it may discourage people from taking loans. Further, the liquidity of money in an economy decreases, causing lesser demand for goods and services.
Lesser demand means the prices of goods and services going down. This way, the central bank controls inflation.
At the same time, if the Reserve Bank of India, sees that the economy has slowed, it may lower the SLR rate to push up the economy, resulting in a higher rate of inflation.
Thus, the role of the Reserve bank of India is to make a balance between growth and stagnation.
Note: The Reserve Bank of India can increase the SLR rate by up to 40%.
A case study
In the year 1991, when the economic crisis happened in India, the inflation rate had touched 13.88%. To combat the situation, the Reserve Bank of India raised the rate of SLR to 38.5%.
That translates to a significant amount. The banks had to keep Rs 38.5 crores for each Rs 100 Crore they receive in the form of deposits. Thus, they had only Rs 61.5 Crore out of Rs 100 Crore to disburse as loans, and it squeezed the credit outflow of the banks. Consequently, the money supply in the economy decreased, and inflation is controlled.
As you know, the banks also have to maintain CRR (Cash Reserve Ratio) with the Reserve Bank of India. If we add both the figures of CRR and SLR of that year, it becomes 53.5% (CRR@15% + SLR@38.5% = 53.5%) in total. In other words, banks had only a small portion i.e., 46.5% of the NDTL to disburse as loans. That was a significant amount.
It is the year 2020, and the whole world is suffering from Covid-19. So, the economic growth rate all over the world may suffer, including India.
Meanwhile, in a recent report, Nomura has cut India’s GDP forecast for FY20 to (-5.2%). Further, other Internation Rating agencies and even the world bank have warned a negative number for the global economy.
As a result, the Reserve bank of India has lowered its SLR rates to all-time lows. It means the banks will have more liquid money with them and provide loans at a cheaper rate.
To check the current SLR ratio, click here.
Thus, cheap loans will attract people to take loans, and the demand for goods and services will increase and pushing the economy up.
CRR Vs SLR
SLR – Summing Up
SLR or the statutory liquidity ratio is a weapon used by the Reserve Bank of India to control the money supply, provide liquidity in the banking system, and at the same time, compel banks to invest in the government securities. Thus, it kills three birds with one stone, and understanding these financial concepts will empower you to make an informed decision in your personal financial life.
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