Necessity and Components of SLR

Necessity and Components of SLR

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A mandatory reserve requirement that Indian commercial banks must maintain is what the SLR or, the Statutory Liquidity Ratio means. They must keep it up with liquid assets like cash, gold, bonds, PSU securities, and approved securities issued by the RBI. The RBI Act requires commercial banks to hold SLR for a portion of their net demand and time liabilities (NDTL). This percentage of SLR is set by RBI to control a commercial bank's growth. The ability of a financial institution to inject money into our economy is controlled by a change in this ratio. As a result, the RBI raises it when inflation is high to prevent banks and NBFCs from offering loans. The Statutory Liquidity Ratio is made up of two parts:

1. Liquid Assets - Liquid assets are assets that can be easily converted into cash. This category includes government bonds, gold, cash reserves, treasury bills, and securities approved by the RBI. Additionally, these include securities that are eligible for Market Borrowing Programs and Market Stabilization Schemes.

2. The sum of a bank's public demand and time deposits is referred to as its net demand and time liabilities (NDTL) - Current and savings accounts, demand drafts, and other types of demand deposits are all examples of liabilities that a bank must pay immediately. Time liabilities, on the other hand, like fixed deposits, don't let you withdraw money right away. You cannot access the deposit before these reach maturity.

Necessity for the SLR or, the statutory liquidity ratio - The statutory liquidity ratio in India helps the RBI accomplish the following goals.

• SLR controls the bank to oversupply the public with liquid cash.

• It directs our economy's money supply and currency movement.

• It becomes an essential tool for dealing with both inflation and deflation.

• By increasing the amount of money available for prompt credit needs, it ensures the solvency of all financial institutions.

• Government debt management strategies are supported by SLR.

• It makes it easier to invest in government securities.

How does the SLR or, the Statutory Liquidity Ratio affect investors? - The minimum lending rate, or base rate, is determined by the RBI using SLR as a reference rate. Under this rate, no bank can lend money to the general public. It is fixed so that lending and borrowing in the credit market are clear. The RBI's reserve requirement limits the lending capacity of banks. As a result, banks typically raise their lending rates to manage demand.