Statutory liquidity ratio (SLR)

Monetary terms 

SLR:Statutory liquidity ratio (SLR) is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers. Statutory Liquidity Ratio is determined by Reserve Bank of India maintained by banks in order to control the expansion of bank credit.

Repo rate : It is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Cash Reserve Ratio: It is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances. Higher the CRR with the RBI lower will be the liquidity in the system and vice versa.

Why these reserves has to be maintained?

  • To ensure that banks always have cash or equivalent security to pay the depositor whenever there is demand.
  • The banks also need to invest 20% of SLR as government securities.These reserves are also used by the RBI to tighten or ease monetary conditions in the economy.More the SLR with RBI, less will be cash with banks to lend.

    Consequence on common person

  • The reduce in SLR would increase the banks lending horizons as the banks have to hold comparitvely a lesser amount in reserve. Provided this situation the banks would reduce the interest rates encouraging business establishments from multi national organisations to medium and small enterprises
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