A Brief of SLR

Statutory Liquidity Ratio is the amount a commercial banks needs to maintain in the form of cash, or gold, or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by RBI in order to control the expansion of the bank credit.

The maximum limit of SLR is 40%

Current SLR is 22% of NDTL

What is a Basis point ?  
It is the increase in interest rates in percentage terms. For instance, if the interest rate increases by 50 basis points (bsp), then it means that interest rate has been increase by 0.50%. One percentage point is broken down into 100 basis points. Therefore, an increase from 2% to 3% is an increase of one percentage point or 100 basis points.

NDTL -  is the sum of all the demand (current account and savings account sum in bank ) and time (fixed deposits or recurring deposits etc. which are to be paid on maturation), these are assets for us but a liability(debt) for the banks.

Here is an example to show the effect of CRR and SLR.

Let say our Lena Bank had 100 Rs as NDTL they can give this much amount of loan to the needy hence Rs 100 will flow in the market(can cause inflation), so Mr. Bond (Rajan of RBI) said keep 4% (CRR) with us and 22% as SLR in the form of govt securities and gold (which can’t be given as loans) so Lena bank is left with only 74% [100 - (22 + 4)] of the NDTL resulting in lesser money to be given as loans and eventually resulting in a check on inflation.

The main objectives for maintaining the SLR ratio are the following:
i. to control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.
ii. to ensure the solvency of commercial banks.
iii. to compel the commercial banks to invest in government securities like government bonds.

Main use of SLR:
SLR is used to control inflation and propel growth. Through SLR rate the money supply in the system can be controlled effectively.

What is the difference between SLR and CRR?
What SLR does is it restricts the bank's leverage in pumping more money into the economy. On the other hand, CRR, or cash reserve ratio, is the portion of deposits that the banks have to maintain with the RBI. Higher the ratio, the lower is the amount that banks will be able to use for lending and investment.
The other difference is that to meet SLR, banks can use cash, gold or approved securities where as with CRR it has to be only cash. CRR is maintained in cash form with RBI, where as SLR is maintained in liquid form with banks themselves.

What does a reduction in SLR mean?
A cut in SLR means that the home, car and commercial loan rates will go down. Banks will have more money with them.
With the reduction of SLR, the RBI is shrinking the market for government securities and simultaneously enlarging availability of credit to the private sector. With that, the cost of funds to the government will increase and the rate charged by banks to the private sector decreases.

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