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Commercial banks in India were needed to maintain statutory liquidity percentages (SLRs) in money, gold, other government-approved securities before granting credit or loans to customers. The SLR is set by the Reserve Bank of India (RBI) to keep borrowing growth under control.
Statutory Liquidity Ratio Objectives
• Supporting the RBI to ensure the financial soundness of commercial banks.
• To encourage the growth of bank credit. The Bank Of India ( rbi can stimulate or discourage interest rate rise on its protracted lending programmes by adjusting the SLR rates.
• The central bank imposes SLR on commercial banks, requiring them to buy or invest in treasury bonds.
Explaining Statutory Liquidity Ratio and how does it work?
• By the end of the day, every bank has to have a certain percentage of its Net Total liabilities (NDTL) in cash, gold, or even other liquid assets. The Liquidity Coverage Ratio is the ratio of all these financial cash to demand and long span (SLR). The Reserve Bank of India (RBI) seems to have the power to raise this ratio by as much as 40%.
The components of the Statutory Liquidity Ratio
Liquid Assets
Gold, government-approved securities, currency reserves, treasury notes, and government bonds are all assets that may readily be converted into cash.
Net Demand Liabilities
It works similarly to your checking and savings accounts, from which you can withdraw funds at any moment.
Time Liabilities
It’s similar to your Fixed Deposit Bank Accounts, where you can’t take your money right away but must wait a specific amount of time.
Cash reserve ratio:
The CRR (Cash Reserve Ratio) is a mandatory reserve that should be kept the with Reserve Bank of India. Every bank was needed to maintain a cash position with the RBI equal to a certain proportion of its net demands and time obligations.
The CRR is the proportion of total deposits that a commercial bank is required to retain as cash reserves with the RBI.
Difference Between CRR And SLR
Basis For Comparison | CRR | SLR |
Meaning | The CRR is the number of funds that banks are required to deposit in the form of cash with the central bank. | The SLR is the number of funds that banks must keep in liquid assets, such as cash, gold, and authorised securities. |
Regulates | The country’s monetary stability | Leverage the bank for loan expansion |
Use | To remove surplus money from the financial system. | To safeguard the commercial bank’s solvency. |
Maintenance with | Central Bank of India i.e. RBI | Bank itself |
Return | Banks do not get any interest on the money held in CRR. | Banks often earn interest on funds held in SLR. |
There are several similarities between CRR and SLR.
The following are some of the commonalities between SLR and CRR:-
• The SLR & CRR are set by the RBI.
• The SLR and CRR have the potential to influence inflationary pressures.
• The Reserve Bank of India made it necessary for banks to maintain statutory liquidity and cash reserve ratios.
What Is SLR and How Do I Calculate It?
SLR = 100 percent (liquid assets / demand + time liabilities).
Example
As an example, consider ABC Bank. The bank’s liquid assets are $20 million. NTDLs are worth Rs200 million to the bank (net time and demand liabilities). Assist the management of ABC Bank in determining the required liquidity ratio.
LA / NTDL = (Rs 40,000,000 / Rs 400,000,000)x100 Statutory Liquidity Ratio
The statutory liquidity ratio is 10%.
As a result, the bank’s SLR stands at 10%
SLR RATIO’S PURPOSE
The statutory reserve ratio (SLR) was introduced to enable Indian financial companies to keep liquidity on their balance sheets. Inflation & credit flow control are also aided by the SLR.
Currently, the liquid-to-statutory ratio is at a high level.
The SLR ratio is currently 18.00 per cent.
SLR Rate at the Moment
CRR
Cash Reserve Ratio (CRR)
It is the amount of money that banks must keep on hand at all times with both the Reserve Bank of India (RBI). If the central bank decides to raise the CRR, the amount available for disbursement at the bank decreases. The CRR is used by the RBI to remove excess money out of the system.
OBJECTIVES OF CRR
The Cash Reserve Ratio (CRR) is one of the most essential components of the Reserve Bank of India’s monetary policy. The following are CRR’s primary goals.
• CRR is in charge of the market’s money supply.
• CRR aids in the avoidance of cash shortages and the maintenance of the economy’s inflation rate.
Conclusion
SLR stands for Statutory Liquidity Ratio, which is the minimum proportion of deposits that a financial institution must keep in liquid cash, gold, or other assets. It’s essentially the margin requirement that banks must meet before they may extend credit to clients. These are mainly held by the banks themselves, not the Reserve Bank of India (RBI).
