Reduction in the Statutory Liquidity Ratio

Reduction in the Statutory Liquidity Ratio

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Many a time, the Reserve Bank of India itself engages in the reduction of the statutory liquidity ratio (SLR) of the country’s banks. There are many reasons for this cut in the SLR:

• One of the reasons is that it is done so that banks can work with a higher authority and without any interference from any other institution.

• The SLR is also reduced at times so that the base rate of the economy is in a good position. Since the base rate affects the entire lending process massively, extra care is taken by the central bank of the nation so that the lending process is conducted smoothly across all banks. The RBI monitors and alters the base rate on a very frequent basis as it is subject to a lot of changes because of market fluctuations, etc.

• The is sometimes also decreased in order to remove the monotony with which many banks function. There are several banks in the nation that tend to operate very lethargically during certain periods of the year. They do not bring any change in their banking process and perform without coming up with new ideas or initiating any new programmes or projects to improve the process of the institution. They do not make any financial or process improvements. With the objective of eliminating this monotonous form of working, the RBI minimises the statutory liquidity ratio so that every bank gets the opportunity to work with a lot of dedication and commitment. It also motivates bank staff to perform better every month and encourages them to take up new initiatives to enhance and improve the operations of each bank branch.

• The SLR Rate is sometimes cut by the Reserve Bank of India with the aim of making outstanding economical as well as financial betterments in the overall economy. When every bank in the nation works towards attaining the accurate SLR set by the RBI by implementing specific goals; by planning, designing, and implementing appropriate measures; and by adhering to the exact standards set by the RBI, the overall economy will naturally improve and move towards a better position in the global financial market.

A reduction in the SLR Rate according to the prevailing circumstances in the nation and across the world will assist in attaining financial stability. Financial stability is highly important in today’s ever-changing financial environment that sees constant change and fluctuations.

How does one decide the correct SLR level? - One may wonder what the accurate SLR Level for any bank should be. It is commonly known that every bank functions by taking risks. Every bank has a certain component known as risk capital. This refers to the capital that is promised by the owners of any bank. This risk capital serves as an excellent buffer against risks that are taken by banks. When a bank functions by taking so much risk, it is extremely important for them to treat this capital very cautiously. Hence, one can clearly decide that the correct SLR Levelwould be the level of any bank’s risk capital. To make sure that a bank’s risk capital is absolutely secure, the bank should maintain its risk capital as the statutory liquidity ratio.