Impact of Statutory Liquidity Ratio on the Base Rate

Impact of Statutory Liquidity Ratio on the Base Rate

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The Statutory Liquidity Ratio plays a very prominent role in fixing the Base Rate of the Indian economy. In India, base rate refers to the minimum rate that is fixed by the Reserve Bank of India (RBI). This is the rate below which no bank can lend funds to borrowers. This rate is determined in order to make sure that there is transparency when banks lend funds to individuals in the credit market. The Base Rate also assists in making certain that banks offer low expenses of funds to any of their clients. It helps in minimising loan expenses for all borrowers.

The Base Rate in India is determined by the statutory liquidity ratio, cash reserve ratio, cost of borrowings, overhead costs, cost of deposits, and lots more. Since the SLR has a role in determining the base rate of the country, the government of India and the Reserve Bank of India work together to make sure that the Statutory Liquidity Ratio is balanced. The statutory liquidity ratio is regularly monitored so that banks have a higher leverage and a better influencing aspect. The RBI also looks into how banks monitor their availability of funds for accepting deposits from customers and for giving as credits to customers.

The RBI is constantly working towards attaining financial inclusion. Hence, it is coming up with more and more strategies and techniques that can be applied in a cost-effective manner in order to make sure that banks have sufficient funds in their safe for ready credit. Earlier, banks use to avoid having any idle funds in their branches and hence, when there was any sudden and urgent requirement for credit or for any other form of funds, they failed as a lender at times.

In order to avoid this bad situation, the RBI makes it mandatory for banks to maintain a certain ratio of funds with the central bank of the nation. The RBI also wants banks to be very careful with the advances that are given by the government.