SLR Full Form & Meaning

As a potential customer of a bank, you might have heard of the term “SLR.” But, do you know what SLR stands for? SLR stands for Statutory Liquidity Ratio. In this article, we will explore the full form and meaning of SLR and why it is important in the banking sector.

SLR = Statutory Liquidity Ratio

Definition of SLR

SLR stands for Statutory Liquidity Ratio. It is the percentage of deposits that a bank has to maintain in the form of liquid assets, such as cash, gold, and government securities, as mandated by the Reserve Bank of India (RBI).

SLR Requirements in India

The RBI sets the SLR requirements for banks in India. As of March 2022, the SLR requirement for banks is 18%. This means that banks need to maintain at least 18% of their net demand and time liabilities (NDTL) in the form of liquid assets.

Purpose of SLR

The primary purpose of SLR is to ensure that banks have enough liquid assets to meet their obligations. Banks are financial intermediaries that mobilize deposits from customers and lend them to borrowers. SLR ensures that banks have sufficient funds to repay depositors in case of any emergency.

Benefits of SLR

There are several benefits of SLR, including:

• Ensuring liquidity in the banking system
• Protecting depositors’ funds
• Encouraging banks to invest in safe and secure assets
• Providing stability to the financial system

Consequences of Breaching SLR

If a bank fails to maintain the required SLR, it can face severe consequences, such as penalties and fines from the RBI. Additionally, breaching SLR can lead to a decrease in the bank’s credit rating, which can negatively impact its ability to raise funds from the market.

Relationship Between SLR and CRR

SLR and Cash Reserve Ratio (CRR) are both tools used by the RBI to control the money supply in the economy. While SLR refers to the percentage of deposits that banks have to maintain in the form of liquid assets, CRR refers to the percentage of deposits that banks have to keep with the RBI as reserves.

Differences Between SLR and CRR

The key differences between SLR and CRR are:

• SLR is maintained in the form of liquid assets, while CRR is maintained in the form of cash reserves.
• Banks do not earn any interest on CRR, while they earn interest on SLR.
• SLR is used to maintain liquidity in the banking system, while CRR is used to control inflation.

SLR vs Repo Rate

Repo rate is the rate at which banks borrow money from the RBI. When the repo rate is increased, banks have to pay a higher interest rate to borrow money, which can lead to an increase in lending rates. SLR, on the other hand, does not directly impact lending rates. However, an increase in SLR can reduce the availability of funds for lending, which can indirectly impact lending rates.

Impact of SLR on Interest Rates

SLR indirectly impacts interest rates in the following ways:

• When SLR is increased, banks have to maintain more liquid assets, which can reduce the funds available for lending. This can lead to an increase in lending rates.
• If there is a shortage of funds in the market, banks may have to borrow money at a higher rate, which can increase their cost of funds. This can lead to an increase in lending rates.
• When SLR is reduced, banks have more funds available for lending, which can lead to a decrease in lending rates.

Conclusion

In conclusion, SLR is a crucial aspect of the banking system in India. It ensures that banks have enough liquid assets to meet their obligations and protects depositors’ funds. SLR indirectly impacts interest rates and helps maintain stability in the financial system.