SLR (Statutory Liquidity Ratio)

What is Statutory Liquidity Ratio (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’s 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.