Understanding SLR Full Form – Statutory Liquidity Ratio: Meaning, Components, and Current Rate

Last Updated : July 14, 2023, 10:50 a.m.

SLR full form is Statutory Liquidity Ratio, the minimum deposit percentage commercial banking institutions retain via gold, cash, and other securities. The RBI announced and fixed the SLR. The RBI determines the SLR percentage to control a commercial bank’s expansion. A modification in the ratio control’s a financial establishment’s liability to inject money into the Indian economy. Hence, the RBI hikes it in the inflation time to limit banking institutions and non-banking financial companies from providing loans. SLR helps retain liquidity in banking institutions, and the RBI uses the devices to control inflation. Want to know more about Statutory Liquidity Ratio? Let’s explore the definition of SLR, how it works, its components and the current rate.

What is Statutory Liquidity Ratio?

The meaning of SLR full form is a compulsory reserve requirement that commercial banking institutions in India should retain. They should retain it with the help of liquid assets, such as bonds, cash, PSU, gold, and RBI-approved securities. It is the minimum reserve that banking institutions must hold before they lend credit to their customers. In simple words, it is the ratio of a bank’s liquid assets to its NDTL. The RBI provides rules and regulations to banks to classify liquid assets under SLR smoothly.

The RBI made it mandatory for commercial banks to retain a percentage of their net NDTL as Statutory Liquidity Ratio. The word ‘statutory’ in SLR signifies that Statutory Liquidity Ratio maintenance is a compulsory requirement.

Objectives of Statutory Liquidity Ratio

The following are the objectives of the Statutory Liquidity Ratio:

Limit Commercial Banking Institutions from Over Liquidating

A bank or a financial establishment can come across over-liquidation when the Cash Reserve Ratio increases without the Statutory Liquidity Ratio, and the bank requires funds. The RBI puts the Statutory Liquidity Ratio into action to control the bank credit. The Statutory Liquidity Ratio guarantees that commercial banking institutions are solvent and banking institutions invest in government-approved securities.

To Hike or Reduce Bank Credit Flow

The RBI increases the Statutory Liquidity Ratio to control bank credit during inflation. Likewise, it decreases the Statutory Liquidity Ratio during the recession to hike bank credit.

How Does Statutory Liquidity Ratio Work?

Each bank should have a specific portion of NDTL in liquid assets form at the end of the day. These liquid assets ratios to the demand and time liabilities are known as the SLR. The RBI has the authority to hike the ratio by 40%. A ratio hike circumscribes a bank’s capability to instil money into the economy. The RBI is in charge of regulating the money flow and costs of steadiness to run the Indian economy. The RBI channels money movement in the economy. The Statutory Liquidity Ratio is among the numerous monetary laws. SLR is a financial tool that guarantees banks’ stability and cash flow into the economy.

Components of Statutory Liquidity Ratio

Sections 24 and 56 of the 1949 Banking Regulation Act mandate that cooperative banking institutions at the central and state level, banks in local areas, scheduled commercial banks, and urban cooperative banks should retain the Statutory Liquidity Ratio. Hence it becomes necessary to know the components of the Statutory Liquidity Ratio in detail. So, what are the components of SLR full form? The following are the components of the Statutory Liquidity Ratio:

Liquid Assets

You can effortlessly convert liquid assets into cash- gold, cash reserves, securities approved by the government, treasury bills, and government bonds. Liquid assets comprise securities qualified under Market Stabilisation Schemes and Market Borrowing Programs.

NDTL

NDTL is the acronym for Net Demand and Time Liabilities. It means the overall demand and deposits of the public that banks in association with other banking institutions hold. Demand deposits comprise liabilities, which the bank should pay on demand, including current deposits, balances in outstanding FDs, demand drafts, and savings deposits portions of demand liabilities.

Time deposits will be paid on maturity, where you can only withdraw your deposits after a while. You must wait for the lock-in period to end and access the funds. FDs, staff security deposits, etc., are a few examples. The bank liabilities include deposit certificates, investment deposits in other banking institutions, and call money market borrowings.

Statutory Liquidity Ratio Current Rate

According to the RBI’s Monetary Guidelines, the Statutory Liquidity Ratio rate is 18%. As per the existing condition of a bank and the economy, the RBI decides the current SLR rate. Banks maintain the SLR on the RBIs instructions. It is necessary to maintain the SLR rate to check the money supply in the economy. Banking institutions that fail to retain the required SLR full form rate will be penalised with a 3% per annum interest rate which must be more than the bank rate. Hence, banks need to maintain the current SLR rate.

Conclusion

To conclude, the current SLR is 18% in India. Nevertheless, the RBI can hike it to approximately 40%. Nevertheless, banks retain these securities themselves and not with the RBI. Banking institutions worldwide work as establishments that hold public deposits securely and offer returns. However, it is a risky function, and all banking institutions should be cautious. The RBI justifies the Statutory Liquidity Ratio by assuring banking institutions’ solvency and safeguarding public money. It is necessary to retain the SLR to check the money supply in the economy. SLR full form is one of the financial instruments that the RBI uses to retain banks’ solvency.

FAQs