The statutory liquidity ratio is regularly monitored so that banks have a higher leverage and a better influencing aspect. As mentioned above, the monetary policy of the RBI requires that every bank maintains a particular set of liquid assets and these should be available at any particular point of time. "Liquid assets" are those which consist of cash . It also helps to perceive the short-term financial position. Statutory Liquidity Ratio popularly called SLR is the minimum percentage of deposits that the commercial bank maintains through gold, cash and other securities. Debt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Copyright 2022 BankBazaar.com. The Reserve Bank of India (RBI) Act states that every commercial bank in India has to keep a certain amount of time deposits as well as demand deposits as liquid assets in its independent and own vault. Disadvantages. It is evaluated as the percentage value of the bank's liquid assets divided by an aggregate of its net demand and time liabilities. In case any bank has not been successful in maintaining the specified SLR (as prescribed by the RBI), then the bank will be required to pay certain penalties. You cannot access byjus.com. Refresh the page or contact the site owner to request access. Earlier, banks use to avoid having any idle funds in their branches and hence, when there was any sudden and urgent requirement for credit or for any other form of funds, they failed as a lender at times. This number appears incorrect/invalid. The Federal Reserve ascertains the SLR or supplementary leverage ratio in the US. 1. Credit to Deposit Ratio: This measures the bank's total credit in relation to its total deposits in the bank. In order to protect the risk of each bank and to reduce their risk rate, the Reserve Bank of India makes it mandatory that each and every bank deploys at least one small part of its funds with the RBI so that its funds are safe in the hands of the most secure entity in the form of the most secure assets. It is a minimum percentage that commercial banks have to adhere to in terms of cash, gold, or security. SLR also helps in maintaining the inflation and credit flow in the country. This risk capital serves as an excellent buffer against risks that are taken by banks. The transaction i, Bank rate is the rate charged by the central bank for lending funds to commercial banks. In India, every scheduled commercial bank, non-scheduled commercial bank, state as well as central cooperative banks, and primary (urban) co-operative banks are compulsorily required to keep a statutory liquidity ratio. If any bank fails to maintain the SLR at a certain specified level, they will be liable to pay a penalty to the Reserve Bank of India. Liquidity measures the short-term ability of the bank to operate and function. Accordingly, it is decided that the balances held by banks with the RBI under the SDF shall be an eligible Statutory Liquidity Ratio (SLR) asset and such balances shall form part of "Cash" for SLR maintenance. Economy PREV DEFINITION NEXT DEFINITION What is 'Statutory Liquidity Ratio' Definition: The ratio of liquid assets to net demand and time liabilities (NDTL) is called statutory liquidity ratio (SLR). The ratio of these liquid assets to the time and demand assets is the statutory liquidity ratio. SLR is a proportion of the Net Time and Demand Liabilities (NTDL) of commercial banks, which are supposed to be retained by them in the form of gold, cash, government securities or any other RBI approved securities . Uh-no! Basic liquidity ratio = Monetary assets / monthly expenses Importance of Liquidity Ratio As a useful financial metric, the liquidity ratio helps to understand the financial position of a company. The following can be considered as the various objectives of the statutory liquidity ratio: RBI or the federal bank employs a statutory liquidity ratio to bring about a check on the bank credit. Let us now look at a real-world example of SLR. Statutory Liquidity Ratio is fixed by Reserve Bank of India(RBI) and maintained by banks in . What is Statutory Liquidity Ratio (SLR) RBI requires Scheduled Commercial Banks (SCBs) to maintain certain percent of liquidity, called Statutory Liquidity Ratio (SLR). Uh-oh! The highest limit of SLR in India was 40%. (As on August 27, 2020). 10,000, then the bank has to maintain liquid assets worth Rs. With the objective of eliminating this monotonous form of working, the RBI minimises the statutory liquidity ratio so that every bank gets the opportunity to work with a lot of dedication and commitment. What is SLR? Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. The banks agreed and retained assets in the form of cash and gold. Ultimately, the induction of money supply in the market boosts the overall economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more. SLR is the percentage of liquid assets or deposits a financial institution must retain for net demand and time liabilities. Time liabilities refer to money that is payable after a certain time period due to assets maturing, while demand liabilities include money withdrawn from a savings account. This is the minimum rate beyond which a bank is not allowed to lend money. The specified ratio of these liquid assets to net demand and time liabilities is defined as a statutory liquidity ratio. The statutory liquidity ratio is also used to bring about a rise and dip in the flow of the banks credit. Through SLR, the Central Bank compels the commercial banks to invest in government securities. This number appears incorrect / invalid. The statutory liquidity ratio makes sure the bank remains solvent and also banks invest in government securities which are always considered to be a safer option. The Central Bank of Nigeria (CBN) has said commercial banks will need to maintain minimum liquidity ratio of 30 per cent in line with regulatory requirement. What you need to know about statutory liquidity ratio. Impractical in Nature: Reserve requirements are impractical to a certain extent as even the slightest of alterations in the required cash-reserve ratio might lead to major changes in the supply of money. The liquidity ratio helps to understand the cash richness of a company. CDs essentially require investors to set aside their savings and leave them untouched for a fixed period. You can learn more from the following articles , Your email address will not be published. Barter Systemda, Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to, The third Basel accord or Basel-III is the cornerstone of banking supervision in the world. The cash reserve ratio (CRR), on the other hand, refers to the percentage of net demand and time liabilities that a financial institution needs to maintain with the central bank in reserves or deposits. The cash reserve Ratio (CRR) is a percentage of money kept by all the banks with the Reserve Bank of India as cash to regulate the flow of money in the economy. Enter your number below. Facebook Twitter Messenger Telegram WhatsApp Share. 1. Commercial banks are not allowed to lend money below the base rate. SLR is used as a reference rate for determining the base rate, i.e., the interest percentage at which financial institutions extend loans. 2022 - EDUCBA. In India, base rate refers to the minimum rate that is fixed by the Reserve Bank of India (RBI). SLR is used to bring about a check on the banks leverage option to monitor its credit growth whereas CRR is purely used by RBI to control the liquidity in the banking system. This is the rate below which no bank can lend funds to borrowers. Financial experts are of the opinion that this move is quite similar to the banks having a Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) and will improve the . In the case of statutory liquidity ratio, these assets can be gold, cash, securities that are approved by the Indian government, etc. Solution:Statutory Liquidity Ratio = [(Liquid Assets) / (Net Demand + Time Liabilities)] 100, SLR = [(278000000000 / (1900000000000 + 660000000000)] 100 = 3.27%. Required fields are marked *. Here by approved securities we mean, bond andshares of different companies. 1,875 as SLR. Asset turnover ratio is the ratio between the value of a companys sales or revenues and the value o, economic growth of country is determined by factors such as Capital structure, Human resources, Nat, Bailout is a general term for extending financial support to a company or a country facing a potenti, According to the RBI, balance of payment is a statistical statement that shows Well be in touch very soon (and we promise not to be pesky!). Save my name, email, and website in this browser for the next time I comment. A CRR refers to a particular percentage of a bank's overall deposits that needs to be kept with the Reserve Bank of India as a cash reserve. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. Just like CRR (Cash Reserve Ratio), SLR is also fixed by the RBI (Reserve Bank Of India). Since the SLR has a role in determining the base rate of the country, the government of India and the Reserve Bank of India work together to make sure that the SLR is balanced. Stimulus package is a package of tax rebates and incentives used by the governments of various countries to stimulate the economy. There are several banks in the nation that tend to operate very lethargically during certain periods of the year. SLR demands the bank to maintain reserves in the form of liquid assets which can be both cash and gold whereas in the case of CRR banks have to maintain only cash reserves with RBI. In order to avoid this bad situation, the RBI makes it mandatory for banks to maintain a certain ratio of funds with the central bank of the nation. Statutory liquidity ratio(SLR) is the term Indian government uses for reserve requirement that all the commercial banks in India has a compulsion to maintain in the form of gold, government securities before it starts providing credit its customers. When a bank functions by taking so much risk, it is extremely important for them to treat this capital very cautiously. Answer (1 of 4): What is SLR (Statutory Liquidity Ratio)? The Reserve Bank of India (RBI) can raise this percentage by up to 40%. The Statutory Liquidity Ratio (SLR) is a prudential measure under which (as per the Banking Regulations Act 1949) all Scheduled Commercial Banks in India must maintain an amount in one of the following forms as a percentage of their total Demand and Time Liabilities (DTL) / Net DTL (NDTL); Please provide some details to get the best offers. It is commonly known that every bank functions by taking risks. The outcome of this impracticality could be really expensive for banking institutions. A statutory liquidity ratio (SLR) is a percentage of liquid assets that a commercial bank or financial institution must retain daily. Statutory Liquidity Ratio (SLR) refers to the proportion of deposits the commercial bank is required to maintain with them in the form of liquid assets (government bonds, gold, cash, and other securities) in addition to the cash reserve ratio. In simple words, it is the percentage of total deposits banks have to invest in government bonds and other approved securities. A certificate of deposit (CD) is an investment instrument mostly issued by banks, requiring investors to lock in funds for a fixed term to earn high returns. SLR is calculated as a percentage of all the deposits held by the bank. There are many reasons for this cut in the SLR: A reduction in the SLR rate according to the prevailing circumstances in the nation and across the world will assist in attaining financial stability. Privacy Policy. approved securities before providing credit to the customers. Why SLR is maintained? Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or government approved securities before providing credit to the customers. The SLR rate is sometimes cut by the Reserve Bank of India with the aim of making outstanding economical as well as financial betterments in the overall economy. The Reserve Bank of India (RBI) does not keep these reserves, but they ask the bank to maintain them. Psst We'll ensure you're the very first to know the moment rates change. It is the RBI which decides on the SLR. Put simply, SLR is expressed as a percentage of deposits. In the absence of a statutory liquidity ratio, a bank can experience the problem of over liquidity with cash reserve ratio going up making the bank in extreme need of additional funds. This is the minimum requirement limit set by a central bankcommercial banksCommercial BanksA commercial bank refers to a financial institution that provides various financial solutions to the individual customers or small business clients. Define statutory liquidity ratio. For reprint rights:Times Syndication Service. Statutory Liquidity Ratio (SLR) is a monetary policy, set by the central bank in order to regulate inflation or increase the growth of the economy. One of the reasons is that it is done so that banks can work with a higher authority and without any interference from any other institution. Please rotate your device for optimal display. On the deficit amount on that specific day, the defaulter bank has to pay penal interest at a rate of 3% per annum above the base rate. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. Great first step! Cookies help us provide, protect and improve our products and services. It is computed using the following formula:SLR = [Liquid Assets / (Net Demand + Time Liabilities)] 100. SLR has always been a significant number to drive the economy or inject liquidity in it. Commercial banks are eligible for lending only if they fulfill SLR. 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