What is Statutory Liquidity Ratio (SLR)?

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The Statutory Liquidity Ratio (SLR) is a mandatory requirement imposed on banks by the Reserve Bank of India (RBI) to maintain a certain proportion of their net demand and time liabilities (NDTL) in the form of liquid assets. These liquid assets typically include cash, gold, and approved securities like government bonds.

Purpose and Impact of SLR

Higher SLR: A higher SLR ratio signifies that banks must hold a larger portion of their deposits as liquid assets. This reduces the amount of funds available for lending, thereby curbing inflation. However, it can also restrict economic growth by limiting credit availability.

Lower SLR: A lower SLR ratio allows banks to lend a larger portion of their deposits, potentially stimulating economic activity. However, it can also increase the risk of inflation if not managed effectively.

Ensuring Liquidity and Stability

    • SLR aims to ensure that banks maintain a minimum level of liquidity to meet depositor demands and other obligations.
    • By mandating banks to hold liquid assets, SLR enhances the stability of the banking system.

    Anti-Inflationary Tool

      • A higher SLR compels banks to hold a larger portion of their funds in liquid assets, reducing their capacity to lend.
      • This reduction in lending capacity acts as an anti-inflationary measure by restraining excessive credit creation and money supply.

      Impact on Credit Availability

        • Banks with higher SLR ratios allocate a significant portion of their funds to investments in government securities and other approved securities, rather than extending loans and advances.
        • This diversion of funds affects the availability and cost of credit in the economy.

        Implementation and Tools Used by RBI

        SLR is a direct reserve requirement for commercial banks. It influences the amount of money available for lending and impacts inflation and economic growth. OMOs are another tool used by the RBI to manage liquidity. The RBI also uses other measures like margins, credit ceilings, and differential interest rates to influence credit allocation.

        • Open Market Operations (OMO): The RBI conducts OMO to regulate liquidity by buying and selling government securities in the open market. While SLR directly dictates the liquidity ratio, Open Market Operations (OMO) involve the RBI buying or selling government securities in the open market.
        • Minimum Margins and Credit Ceilings: RBI sets minimum margins for lending against specific securities and imposes ceilings on credit amounts for certain purposes.
        • Direct Credit Controls: These include administratively setting interest rates on small savings and provident funds, and mandating banks to allocate a specified percentage of their advances to priority sectors.