What is Statutory Liquidity Ratio (SLR) and Its Objectives?
RBI Monetary Policy 2020 – Updated Statutory Liquidity Ratio (SLR) Rates
Statutory Liquidity Ratio (SLR) is the govt term for the reserve demand that commercial banks are required to maintain in the form of cash, gold reserves, Reserve Bank of India (RBI) approved securities before giving credit to the customers. It is directed under Section 24 of the Banking Regulation Act, 1949. The SLR is determined by the RBI. It is usually used to control inflation and fuel growth, by increasing and decreasing the money supply. It controls the credit growth in India. The maximum limit of SLR is 40% and the minimum limit of SLR is 0 In India, the RBI always decides the percentage of SLR. If the bank fails to control the required level of the statutory liquidity ratio, then it becomes responsible to pay penalty to Reserve Bank of India (RBI). The current SLR rate in India is 18.25%.
When the SLR is high, banks have less money for commercial operations and hence less money to lend out. When this happens, home loan interest rates often rise. When the SLR is low, similarly, home loan interest rates are likely to fall.
Specified Assets for SLR
- Cash or
- Gold valued at a price not exceeding the current market price, or
- Investment in the following instruments which are referred to as “Statutory Liquidity Ratio (SLR) securities”:
- Dated securities issued up to May 06, 2011;
- Treasury Bills of the Government of India;
- Dated securities of the Government of India issued from time to time under the market borrowing program and the Market Stabilization Scheme;
- State Development Loans (SDLs) of the State Governments issued from time to time under the market borrowing program; and
- Any other instrument as may be notified by the Reserve Bank of India.
How to calculate the Statutory Liquidity Ratio (SLR)?
SLR Rate = (liquid assets / (demand + time liabilities)) × 100%
What are the components of the Statutory Liquidity Ratio?
There are three major components of SLR:
Liquid Assets
These are assets one can easily convert into cash – gold, govt-approved securities, cash reserves, treasury bills, and government bonds.
Net Demand Liabilities
It is like your Current and Saving Bank accounts from which you can withdraw your money at any time.
Time Liabilities
It is like your Fixed Deposit Bank Accounts where you cannot immediately withdraw your money but have to wait for a certain period.
Where does SLR use?
The SLR is set for a number of purposes. A few uses of SLR are:
- Controlling the expansion of bank credit by changing the level of SLR, the RBI can increase or decrease bank credit expansion.
- Assuring the safety of commercial banks.
- By decreasing the level of SLR, the RBI can increase liquidity with the commercial banks. As a result, it increases investment. This is done to fuel growth and demand.
- Forcing the commercial banks to invest in government securities like government bonds.
What are the objectives of SLR?
Main objectives of SLR are :
- To control the money supply in the economy.
- Through SLR, the Central Bank forces the commercial banks to invest in government securities.
- To support the RBI to assure the safety of a commercial bank.
- To control the expansion of Bank Credits. RBI can increase or decrease bank credit expansion by changing the SLR rates.
Impact of SLR on the Investor
The Statutory Liquidity Ratio works as one of the reference rates when RBI has to decide the base rate. The base rate is nothing but the minimum lending rate. No bank can grant funds below this rate. This rate is fixed to assure clarity with respect to borrowing and lending in the credit market.
When RBI requires a reserve requirement, it assures that a specific portion of the deposits are safe and are always ready for customers to obtain.
What is Bank Rate, Repo Rate, Reserve Ratio, CRR, SLR?
Reverse Ratio:
Banks keep aside a certain percentage of cash reserves or RBI approved assets. There are two types of reserve ratios: 1) Cash Reserve Ratio and 2) Statutory Liquidity Ratio. The current Reverse Ratio is 4.00% effective from Mach 27, 2020.
Cash Reserve Ratio (CRR):
It is the ratio of cash legitimate by RBI to be maintained by commercial banks upon its total deposits. The current Cash Reserve Ration is 4.00% effective from February 9, 2013.
Statutory Liquidity Ratio (SLR):
It is the reserve needed to be managed by commercial banks in the form of liquid cash, gold reserves, and RBI approved securities before approving any credit to the customer.
Current SLR Rate
The current Statutory Liquidity Ratio (SLR) is 18.25%. The Statutory Liquidity Ratio (SLR) last witnessed a change in its level on January 04, 2020, when it declined by 0.25% from its previous level of 18.50%.
Repo Rate:
It is the rate charged by RBI for repurchasing the government securities sold by domestic banks. The current Repo rate is 4.40% effective from March 27, 2020.
Bank Rate:
It is the rate at which RBI gives loans and advances to domestic banks. The current Bank rate is 4.65% effective from March 27, 2020.
Marginal Standing Facility (MSF) Rate
Marginal Standing Facility (MSF) was announced by the RBI in the year 2011-12 Monetary Policy. This facility is effective from May 9, 2011.
Under this facility, the eligible entities may borrow up to 2% of their respective Net Demand and Time Liabilities (NDTL). In the event, the banks’ SLR holding falls below the statutory requirement up to 2% of their NDTL, banks will not have the obligation to seek a specific waiver for default in SLR compliance arising out of the use of this facility.
The MSF facility is for one day except on Fridays when the facility is for three days or more, maturing on the following working day.
What is the difference between the repo rate and reverse repo rate?
Repo rate is the rate at which banks borrow money from RBI. Whereas, the reverse repo rate is the rate of interest at which RBI borrows money from commercial banks.
What is the current repo rate?
The current repo rate in India is 4.40%, effective from March 27, 2020.
How does the repo rate work?
RBI buys government securities from commercial banks at a discounted price. The rate at which it is discounted is the repo rate. After the granted tenure, the respective commercial bank repurchase those government securities from RBI.
How does the repo rate affect the economy?
The change of repo rate is intended to affect the movement of money in the economy. An increase in repo rate decreases the flow of money in the economy, while the decrease in repo rate increases the flow of money in the economy.
What is Reserve Repo Rate?
The rate at which RBI provides interest to banks for depositing funds is called the reserve repo rate. The reserve repo rate at which the RBI borrows money from the banks, instead of lending money to them. The current reverse repo rate is 4.90%.
RBI Monetary Policy Rate
The key indicators of RBI Monetary Policy along with their current rates in the table given below:
|
CRR |
SLR |
Repo Rate |
Reserve Repo Rate |
Marginal Standing Facility rate |
Bank Rate |
|
4.00% |
18.25% |
4.40% |
4.00% |
4.65% |
4.65% |
Source: RBI
Lending / Deposit Rates:
|
Base Rate |
MCLR |
Saving Deposit Rate |
Term Deposit Rate > 1 year |
|
8.45% – 9.40% |
7.50% – 7.95% |
3.25% – 3.50% |
6.00% – 6.40% |
