Contents
- About SLR
- Basic differences between CRR and SLR.
- What are the components of the SLR?
- Liquid Assets
- Net Demand and Time Liabilities (NDTL)
- Maximum and Minimum limit of SLR
- Objectives of SLR
- It keeps the commercial banks from over liquidating
- SLR increases or decreases the flow of bank credit
- Impact of SLR on investor
- The importance of maintaining SLR
About SLR
According to the RBI, every bank must keep a portion of their wealth in the form of liquid assets like cash, gold or other assets. SLR is the ratio of these assets to the demand and time liabilities. This ratio could be increased by up to 40%. And so, this ratio will reduce the amount of money that is injected in the economy. The lower the ratio, the higher the money in the circulation and vice versa.
It comes under a monetary policy adopted by the RBI to control the financial situation of the economy.
Basic differences between CRR and SLR.
| SLR (Statutory Liquidity Ratio) | Cash Reserve Ratio (CRR) |
|---|---|
| In the case of SLR, the banks must have some reserves of liquid assets. These include both cash and gold. | In the case of CRR, the bank is mandated to have some cash reserve with the RBI. |
| Every bank earns some interest on the money saved in SLR. | In CRR though, the banks don’t earn any returns. |
| This ratio is used by the RBI to control the bank’s leverage for credit expansion. | CRR is issued by the central bank to control the liquidity in the market. |
| The SLR makes the bank keep the reserve with themselves. This is in the form of both cash and gold. | But the CRR makes the banks keep this reserve with the Reserve Bank of India. |
What are the components of the SLR?
According to section 24 and 56 of the Banking Regulation Act 1949, every bank in the nation has to maintain a certain level of SLR. It is crucial to know the basic details of these sections.
Liquid Assets
Liquid assets are the one that can be easily converted into cash. Gold, treasury bills, govt-approved securities, government bonds, and cash reserves all comes under liquid assets. In addition to this, certain securities that are eligible under ‘Market Stabilization Schemes’ and those under the ‘Market Borrowing Programmes’ are also Liquid Assets.
Net Demand and Time Liabilities (NDTL)
Net demand and time liabilities refers to the total demand and time liabilities held by the public bank and other banks. Under total demand, comes all the liabilities which the bank needs to pay on demand. For instance, current deposits, demand drafts, balances in overdue fixed deposits and demand liabilities portion of saving banks deposits. Learn Liquid Mutual Funds or Fixed Deposits: How to Select the Best Investment. Also, learn which is better: debt mutual funds or fixed deposits.
Under time deposits, comes all the deposits that need to repay on maturity, where the depositor can’t withdraw money immediately. But the investor waits until the lock-in tenure is over to access the funds. Some of the examples are time liabilities portion of savings bank deposits and staff security deposits. This includes call money market borrowings, certificate of deposits and investment deposits in other banks. Must read on best investment plans to invest in 2019. You could also read on what are the best investment options in India.
Maximum and Minimum limit of SLR
The maximum & minimum limit for SLR is 40% and 23% respectively.
Objectives of SLR
It keeps the commercial banks from over liquidating
In the case of Cash Reserve Ratio goes up and there is no provision of SLR. RBI initiates the SLR to have control over the bank’s credit limit. In addition to this, RBI manages the SLR regulation to have control over the bank credit. Furthermore, SLR helps to ensure that there is solvency in the commercial banks and assures that banks invest some money in government securities.
SLR increases or decreases the flow of bank credit
If the economy is struggling in the time of inflation, the RBI raises the SLR to control the credit. And in the case of deflation, the RBI lowers the SLR to increase the bank credit. Hence, due to this tool, RBI keeps the whole country’s economy is in check.
Impact of SLR on investor
The SLR acts as one of the reference rates when RBI has to ascertain the base rate. Base rate is the minimum lending rate. And so no bank is allowed to lend funds below this rate. RBI fixes this rate to ensure transparency with respect to borrowing and lending in the credit market. The Base Rate also helps the banks to cut down on their cost of lending so as to be able to extend affordable loans.
When the RBI impose a reserve requirement, it ensures that a certain portion of the deposits are safe and are always available for customers to redeem. However, this condition also restricts the bank’s lending capacity. To keep this demand in control, there needs to be an increase in lending rates.
The importance of maintaining SLR
All the banks in India including scheduled commercial bank, state cooperative bank, central cooperative banks, and primary co-operative banks shall maintain SLR according to the guidelines issued by the RBI. You must also learn Objectives, Rules, Key Challenges of Small Finance Bank license.
For this, every bank has to report their Net Demand and Time Liabilities (NDTL) every fortnight to the RBI.
In the case of failure to comply, the RBI will charge a penalty of 3% annually over the bank rate. And even after that, if the bank fails to do so in the working day, then there will be a penalty of 5%.
If you want to know the Best Performing Mutual Funds India. And want to make the best profits on your money, visit our website Wealthbucket. Let us guide you to reap the benefits Debt Mutual fund, Large Cap Mutual fund or Multi-Cap Mutual fund, to achieve your objectives.
Related Articles
Mutual fund agency rules: SEBI norms on commission paid to mutual fund agents
