Justification for SLR or, the Statutory Liquidity Ratio

Justification for SLR or, the Statutory Liquidity Ratio

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A commercial bank is required to retain a minimum percentage of deposits in the form of liquid cash, gold, or other securities, known as the Statutory Liquidity Ratio, or SLR. In essence, it is the minimum amount of reserves that banks must have in order to extend credit to clients. These are held by the banks themselves, not the Reserve Bank of India (RBI). The RBI controls the SLR. The conventional tools used by the central bank's monetary policy to regulate inflation, credit expansion, and liquidity flow have been the cash reserve ratio (CRR) and the standard lending rate (SLR). Section 24 (2A) of the Banking Regulation Act of 1949 established the SLR.

Importance of the Statutory Liquidity Ratio, or SLR - The SLR is a tool used by the government to control inflation and liquidity. While decreasing the SLR will lead to economic growth, raising it will prevent inflation in the economy. Although the SLR is a tool of the RBI's monetary policy, the government must succeed in its debt management programme. The government has benefited from SLR by selling its securities or debt instruments to banks. Because they will receive interest revenue by maintaining their SLR in the form of government securities, the majority of banks will do so.

Several people often ponder how the Statutory Liquidity Ratio, or SLR improves the economy. It is a remarkable direct monetary tool that has occasionally helped the Indian government sell securities and debt instruments to banks. The government's debt management programme has been promoted and strengthened as a result. The programme aims to assist banks in providing top-notch loans to all domestic industries. The SLR also attempts to reduce the amount of government assets that commercial banks own and gradually transition them to private security holdings. The securities connected with SLR are risk-free securities.

Difference between SLR and CRR

• The Cash Reserve Ratio, also known as CRR, is the portion of NDTL deposits that a bank must maintain with the RBI. CRR is stored in cash and is kept with the RBI as well. On these reserves, there is no interest paid.

• SLR, on the other hand, is the portion of deposits that banks are required to hold on hand in their own vault as liquid assets.

• In comparison to the SLR, the CRR is a more useful and active tool for monetary policy. Typically, the RBI modifies CRR to control the economy's liquidity.

What is the precise justification for the Statutory Liquidity Ratio (SLR) requirement?m - The Central Bank of India's decision to set the Statutory Liquidity Requirement (SLR) is primarily motivated by caution. Being cautious and suspicious is crucial while engaging in any type of financial transaction. Every bank in the world operates under the guiding principle of soliciting public deposits and promising to provide customers with funds at par or higher. However, this becomes a risky proposition for every bank. The Reserve Bank of India mandates that each and every bank deploy at least a small portion of its funds with the RBI in order to ensure that their funds are safe in the hands of the most secure entity and in the form of the most secure assets. This is done in order to protect each bank's risk and to reduce their risk rate.