The Statutory Liquidity Ratio is defined as a percentage of total deposits that a bank has to keep in the form of liquid assets for example cash, gold, or government securities. This percentage is fixed by the RBI and currently stands at 22%. The objective of the Statutory Liquidity Ratio is to ensure that banks have enough liquidity to meet their day-to-day obligations and also to reduce the risk of arun on the bank in case of panic withdrawals by depositors. In this blog post, we will take a look at the components of the Statutory Liquidity Ratio and its objectives.
What is Statutory Liquidity Ratio
The Statutory Liquidity Ratio (SLR) is an important tool used by the Reserve Bank of India (RBI) to regulate the liquidity in the banking system. It is the percentage of total deposits that a bank has to maintain in the form of cash, gold, or approved securities. RBI uses this ratio to control credit creation by banks and thus, indirectly, inflation in the economy.
As per the RBI Act, every scheduled bank has to maintain with it a certain minimum proportion of its net demand and time liabilities as specified by RBI from time to time. The present SLR rate is 19.5%. It means that every commercial bank has to maintain Rs.19.5 for every Rs.100 of their total NDTL at the end of the day.
Components of statutory liquidity ratio
The statutory liquidity ratio (SLR) is the percentage of deposits that a commercial bank has to maintain as cash reserves or hold as government securities. The Reserve Bank of India (RBI) uses this ratio to regulate the credit supply in the economy.
There are two components of the SLR:
- Cash Reserves: A certain percentage of deposits has to be maintained as cash with the bank. This is termed as the Cash Reserve Ratio (CRR).
- Government Securities: A certain percentage of deposits has to be invested in government securities. This is termed as the statutory liquidity ratio (SLR).
The RBI uses the SLR to control the amount of money that banks can lend. By increasing or decreasing the SLR, the RBI can increase or decrease the money supply in the economy. When there is too much money in circulation, it can lead to inflation. On the other hand, if there is not enough money in circulation, it can lead to recession.
The objective of maintaining an SLR is to ensure that commercial banks have enough resources to meet their obligations even during times of stress and crisis. It also ensures that banks do not lend too much and create asset bubbles.
Objectives of statutory liquidity ratio
The statutory liquidity ratio (SLR) is a tool used by the Reserve Bank of India (RBI) to control the amount of money banks lend, and is calculated as a percentage of their net demand and time liabilities.
The main objectives of the SLR are:
- To ensure that banks have enough liquidity to meet their cash requirements at all times.
- To encourage banks to invest in government securities, which helps in controlling inflation.
- To ensure that banks maintain a minimum level of reserves, which protects depositors in case of bank failure.
In conclusion, the statutory liquidity ratio is a tool that helps to ensure the stability of the banking system. It does this by setting a minimum level of cash that banks must hold in reserve. This reserve helps to ensure that banks can meet customer demand for withdrawals, regardless of external factors. Additionally, the statutory liquidity ratio helps to promote financial stability by discouraging banks from engaging in risky activities.