Statutory Liquidity Ratio:- There are a lot of components of monetary policy present in India and one of the most important components of the monetary policy is known as a statutory liquidity ratio which is also working as a part of the CRR which is the Cash Reserve Ratio. Given below we will be answering the question of What Is Statutory Liquidity Ratio? We will also share with all our readers the specifications of the Meaning, Definition & SLR Formula. You can check out the objectives and also the need for using SLR in various monetary policies available in India.
Table of Contents
What is a Statutory Liquidity Ratio?
Statutory Liquidity Ratio is the ratio of the bank’s liquid assets to the bank’s net demand and time liabilities which is also called NDTL. This ratio refers to the minimum Reserve Requirement that is needed to be maintained by the commercial banks in India and each and every commercial bank in India will have to keep a certain amount of liquid assets in immediate cash so that it can be provided to the customers in any time of emergency. This liquid ratio includes all assets such as gold, cash and securities approved by the Indian Government. This ratio must be maintained by all of the commercial banks as for the rules and regulations presented by the Reserve Bank of India.
Working of Statutory Liquidity Ratio
Each and every commercial bank will have to make a particular portion of their liquid assets including gold and other liquid assets into immediate cash as per the rules and regulations maintained by the Reserve Bank of India and this ratio is called the statutory liquidity ratio. The Reserve Bank of India can increase the percentage of this ratio to about 40% as per their authority. If this ratio is increasing then the bank will not be able to inject money into the economy and this ratio is increased and decreased as per the flow of money and the stability of prices that are needed to run the Indian economy. SLR is one of the main monetary policy instruments in order to maintain proper inflation in the community.
There are two components that you must take into consideration while collecting the SLR. Liquid assets and demand + time liabilities are needed in order to calculate the SLR and the formula to calculate the SLR is liquid assets/ (demand plus time liabilities)
Components of Statutory Liquidity Ratio
There are various components that will be affecting the SLR and taking into consideration these important components the RBI will be maintaining the SLR:-
- The RBI will be deciding the SLR taking into consideration the assets that can be converted easily into cash such as gold, treasury bills, government approved securities, Government bonds and cash reserves.
- NDTL is one of the major components of SLR and it consists of the total demand and time liabilities of the public that are held by the commercial banks with the other banks. Demand deposits include all of the liabilities that the banks will have to pay on demand. Time deposit consists of the deposit that will have to be repaid on maturity.
Statutory Liquidity Ratio FAQs
The Reserve Bank of India have all of the authorities to put the upper limit of SLR at 40% and the lower limit of SLR at 23%
The first objective of maintaining a good SLR is to prevent the commercial bank from over liquidating their assets and the next objective is to decrease or increase the flow of bank credit into the customers.
If any commercial bank fails to maintain the SLR, RBI will levy a 3% penalty annually over the bank rate. Defaulting on the next working day too will lead to a 5% fine.
SLR = (liquid assets / (demand + time liabilities)) * 100%.
As per the Reserve Bank of India monetary policy, the current SLR rate is 18%.