The abbreviated term for Statutory Liquidity Ratio, the term SLR essentially denotes the least amount of deposit that any Indian commercial bank maintains. This deposit can be of diverse types such as cash, gold or any other kind of security deposit which is approved by the government of India. It helps a bank to ensure that they are eligible to give credit to their customers. RBI or the Reserve Bank of India fixates the SLR. 

Chief Components of SLR

According to the provisions of Banking Regulation Act 1949 under Section 24 and 56, it is absolutely imperative for every commercial banks, state and central aided banks, local banks etc. to maintain SLR. It is one of the chief monetary policies which is devised in order to control credit growth. But before delving deeper into the concept of SLR, it becomes necessary to list down its chief components. 

  1. LIQUID ASSETS: One of the most significant elements of SLR are the liquid assets. Essentially, liquid assets is a term which is used to denote those assets which can be converted into hard cash without much complication. Assets like gold, government bonds, and security deposits approved by the government all fall under the category of liquid assets.
  2. NDTL: The abbreviated name used for Net Demand and Time Liabilities, NDTL refers to the time liabilities as well as public demands which are held between banks.
  3. SLR LIMIT: There is a limit to SLR. The upper limit of SLR is 40% while the lower limit is 23%.

The Correct SLR Level

Through time and again, there arises many concerns about what is the correct SLR level and how to determine it. Each and every functioning bank has a component called the ‘risk capital’. This is the capital that the bank promises as well as possesses. Every bank has its own share of risk capital that serves as an important component of its functionality. Thus to maintain the proper functioning of these banks, it is absolutely necessary to ensure that the risk capital is in a secure position. Hence, the SLR level of a bank should be near about the same amount as its risk capital.

SLR and its Impact on Base Rate

The Indian Economy is solely dependent on the SLR level to maintain its base rate. The concept of Base Rate can be translated into the minimum rate that is taken as a base below which no bank can lend any financial assistance to its customers. The Base Rate that is determined by The Reserve Bank of India is considered to be India’s Base Rate. The base rate helps all the banks to ensure transparency and also creates a sustainable development. It also helps the borrowers to loan at the minimum rate.

Objectives of SLR

  1. TO STOP OVER-LIQUIDATION OF COMMERCIAL BANKS: One of the primary objectives of SLR is to stop over-liquidation. It can result in an increasing ratio of Cash Reserve Ratio pushing the commercial bank towards financial crisis. So the SLR is implemented to regulate bank credit. 
  2. TO REGULATE BANK CREDIT: The flow of bank credit decreases during inflation as the SLR goes up. Similarly, by decreasing the SLR in times of recession, the Reserve Bank of India ensures that the bank credit increases. 

Conclusion

Every bank and financial institution which has to maintain SLR are required to follow certain protocols. On every alternate Friday, these banks need to submit a compulsory report to the RBI informing them about their SLR status. If one fails to maintain the required SLR, then that financial institution has to pay heavy penalties to the RBI.