What does it mean?
SLR is percentage of a bank's net time and demand liabilities that a commercial bank has to maintain as reserve on daily basis, in the form of liquid assets, with itself.
Liquid assets are assets in the form of cash or investments in gold, unencumbered investments in dated securities issued by govt, treasury bills, SDL bonds (state development loan) bonds issued by State govt and any other instruments notified by RBI.
Simply put, it is a reserve amount that the bank has to retain with itself, in its own vaults and only balance is available for extending credit to customers.
What is the requirement wrt SLR?
Every commercial bank has to maintain said portion of their net time and demand liabilities, in the form of liquid assets, by the end of each day.
This requirement is fixed by the Reserve Bank of India and is revised from time to time. RBI has authority to increase the ratio upto 40%.
What purpose does it serve?
SLR has got the utility of serving as monetary policy measure.
Used by RBI to control credit flow in bank:
to control the supply of money during inflation or increase the supply of money during deflation scenario.
how does it work?
RBI can raise the SLR percentage, which in turn would reduce the funds available with banks for lending to consumers and business ------>This consequently results in increased cost of lending and curtails the demand for new credit. This will in turn reduce the cash flow in the economy and consequent decrease in aggregate demand which thereby reduces inflation.
Similarly, reducing SLR leaves more liquidity with the banking system, which in turn more fund available for lending and decreased cost of lending.
And with loans availability, increased business and economic activity, that in turn fuels growth and demand in the economy.
What is SLR computation formulae?
SLR= [ liquid assets / (Net Demand + Time liabilities) ] x 100
Net demand liabilities : Demandable by customer at any point and on demand, it becomes immediately payable liability of bank. e.g. Demand draft, current and saving deposits account, matured balances of fixed deposits etc.
Time liabilities: liabilities payable by the bank after a pre-notified specific time period. eg fixed deposits, recurring deposits, gold deposits etc.
Applicable to which institution?
SLR is applicable to all scheduled and non-scheduled commercial bank, foreign banks, small finance banks, local area banks, deposit taking NBFCs and even payment banks and cooperative banks unless stated to the contrary.
Only non-deposit taking NBFCs are exempted from SLR.
Are there any Reporting requirements?
Banks have to ensure compliance wrt SLR on a daily basis. As far as reporting requirement is concerned, banks have to report to RBI their NDTL (net demand and time liabilities) every alternate Friday (ie on fortnightly basis).
Penal provisions:
On failure of the banks to maintain SLR required, as on any day, the defaulting bank shall be subject to penal interest for the day, at the rate of 3% p.a over and above the Bank rate, calculated on the amount that is in shortfall.
If the default continues on the next working day also, then the penal interest can be increased upto 5% p.a over and above the bank rate, calculated for the respective days and on the amount that is in shortfall.
CURRENT SLR:
SLR currently applicable which came into effect from 08.02.2023 is 18%.
SLR continues to be at 18% as on 20th July 2024.