SLR (Statutory Liquidity Ratio) is the amount a commercial bank 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 the RBI (Reserve Bank of India) in order to control the expansion of bank credit.
How is SLR determined?
SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. .
What is the Need of SLR rate?
With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds..
What are the cornerstones of SLR?
SLR refers to the amount to be kept separately by every commercial bank in the country. No bank is an exception to the SLR. This amount is to be stored in different forms such as gold, cash and government securities. This amount is to be separated from the total amount before the credit is given to the customers. The SLR receives first priority. It is not the remaining amount left after giving credit to the customers. The Reserve Bank of India (RBI) is the main authority for determining SLR. It performs the functionality of controlling the bank credit and its expansion.
The SLR is determined and formulated for a purpose. The solvency of commercial banks can be determined by the SLR. If the SLR is maintained by a commercial bank, then the Reserve Bank of India can understand the credit-allocation capacity of a commercial bank. Just as a commercial bank evaluates the creditworthiness of a loan applicant, similarly, the RBI also evaluates the solvency of a commercial bank with the help of SLR. The bank credits and its expansion can be controlled by determination of SLR. If SLR rates are modified, then RBI can modify the bank credits, its expansion or maintenance. SLR also helps RBI to provide instructions to the commercial banks for investing in government securities such as bonds. Thus, SLR also helps in increasing the government securities.
SLR rate to Control Inflation and propel growth
SLR is used to control inflation and propel growth. Through SLR rate tuning the money supply in the system can be controlled efficiently.
The Statutory Liquidity Ratio helps an economy in various ways. The inflation and its effects can be controlled by adjusting the SLR. Similarly, the economic growth of a country can be propelled with the help of SLR. If SLR is properly determined by the Reserve Bank of India, then the money supply in the economy can be tuned effectively. Thus, it helps in efficient control of the monetary system of the company. So, during inflation, RBI should make necessary adjustments to the SLR for controlling the implications of inflation on the economy.
Thus, SLR is an important measure for an economy. Its suitable adjustments by RBI helps in monitoring bank credit issues.