Statutory Liquidity Ratio (SLR) is the minimal reserve threshold that banks must meet before extending credit to clients. In this article, we have discussed SLR in detail.
A commercial bank is required to maintain a certain minimum level of deposits in the form of liquid cash, gold, or other securities.
This is known as the Statutory Liquidity Ratio or SLR. These deposits are held by the banks themselves, not the Reserve Bank of India (RBI).
In essence, it is the minimum amount of reserves that banks must hold to extend credit to customers. The RBI sets SLR as a measure of control over credit expansion in India.
Every scheduled commercial bank, non-scheduled commercial bank, state, and central cooperative bank, and urban cooperative bank in India is compelled to maintain a statutory liquidity ratio.
The Reserve Bank of India (RBI) uses the statutory liquidity ratio as a tool for its monetary policy to evaluate the liquidity available to banks.
SLR mandates that banks hold a specific percentage of their funds in certain central and state government securities.
The SLR is a tool used by the government to control inflation and promote growth. While lowering the statutory liquidity rate will lead to economic growth, raising the SLR will help control inflation.
The current SLR rate stands at 18%.
The SLR rate's primary goal is to stabilize the liquidity in Indian financial institutions that are currently in operation. Other objectives of SLR include -
SLR is crucial in determining the lowest rate at which a bank can loan money to its clients. This minimum amount is known as the base rate. It increases transparency between the RBI and the banks.
Banks are required to pay the Reserve Bank of India a fine if they don't maintain the required SLR. A penalty of 3% over the bank rate must be paid by the defaulting bank on the day's deficit amount.
The statutory liquidity ratio is essential for preserving credit flow and enhancing the global economy as a whole.
RBI directs the rate of Statutory Liquidity Ratio as suited to the economic conditions of the country.
All commercial banks must uphold the SLR rate to ensure transparency in their operations and for consumer benefit.
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This article is for informational purposes only and does not constitute financial or legal advice. Always consult with your financial advisor for specific guidance.
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