SLR

SLR Full Form: Statutory Liquidity Ratio

Key Highlights

• The Statutory Liquidity Ratio (SLR) is a rule that requires Indian banks to set aside a portion of their deposits in liquid assets like cash, gold, or government-approved securities.

• The Reserve Bank of India (RBI) uses SLR as a key tool to manage the flow of money in the banking system and keep banks financially healthy.

What is SLR?

The Statutory Liquidity Ratio (SLR) is a rule that requires Indian banks to set aside a portion of their deposits in liquid assets like cash, gold, or government-approved securities. This ensures banks have enough funds to stay stable and handle customer needs. The Reserve Bank of India (RBI) uses SLR as a key tool to manage the flow of money in the banking system and keep banks financially healthy.

Key Features of SLR

• Current Requirement: Banks must keep 18% of their deposits in liquid assets.

• How it is Calculated?

SLR = (Liquid Assets ÷ Total Deposits) × 100
Liquid assets include cash, gold, and government securities.

• Who Sets It: The RBI decides the SLR and adjusts it based on the economy. It can go up to 40% but has no fixed minimum limit.

Why SLR Matters?

1. Liquidity: Ensures banks have enough money to handle customer withdrawals.

2. Controls Inflation: A higher SLR reduces lending, helping control inflation. A lower SLR increases lending, boosting economic growth.

3. Impacts Interest Rates: A higher SLR often leads to higher loan rates because banks hold more liquid assets.

Objectives of SLR

1. Bank Stability: Prevents financial crises by ensuring banks keep liquid assets.

2. Liquidity Management: Helps banks meet their financial obligations smoothly.

3. Economic Control: Helps RBI manage how much money banks can lend, balancing inflation and growth.

4. Government Support: Encourages banks to invest in government projects by buying government securities.

5. Credit Regulation: Controls the availability of loans to prevent excessive borrowing or inflation.

Uses of SLR

1. Regulating Credit: Higher SLR means banks lend less, stabilizing the economy.

2. Setting Loan Rates: Changes in SLR can affect borrowing costs.

3. Ensuring Compliance: Banks must follow SLR rules, or they face penalties from the RBI.

4. Market Stability: Promotes safer investments and keeps financial markets steady.

5. Boosting Growth: Adjusting SLR can either slow or speed up economic activity based on needs.