Statutory Liquidity Ratio or SLR is the minimum reserve threshold that a scheduled bank or NBFC or any commercial lender must meet before it can start extending credit to credit borrowers. It is important to understand the concept of the Statutory Liquidity Ratio and the Statutory Liquidity Ratio Rate as it directly impacts the interest rate on various loans.
What is the Statutory Liquidity Ratio and Why is it Important?
As per the latest RBI norms, any bank functioning under the purview of the Reserve Bank of India must set aside a portion of its net time and demand liabilities (NTDL) in the form of liquid cash, gold, and other government-approved securities before it can start lending money or extending credit to applicants. This percentage of the total NTDL that a bank must set aside is known as the Statutory Liquidity Ratio. An important thing to note here is that banks are supposed to maintain the SLR with themselves and not the Reserve Bank of India.
Why is the Statutory Liquidity Ratio Important?
Scheduled banks and lenders must maintain the statutory liquidity ratio or SLR. The word 'statutory' in SLR makes maintaining this ratio legally mandatory and not doing so can lead to the Reserve Bank of India slapping a hefty penalty on the defaulting bank or lender. In case a bank fails to maintain the SLR, they are asked to pay a penalty of 3% above the Bank Rate.
Through the SLR ratio, the Reserve Bank of India ensures that every bank in this country is invested in government securities. Further, the SLR also allows RBI to get a clear understanding of the liquidity available to banks at any time. This helps the Reserve Bank of India formulate its monetary policy. Further, the RBI also uses SLR to control inflation and maintain economic growth.
Inflation is a metric that allows you to understand how much the prices of commodities have increased over a while. When inflation increases continuously over a while, goods and services become unaffordable to buyers. Therefore, it becomes important for the Reserve Bank of India to step in. When inflation increases unabated, then the Reserve Bank of India increases the statutory liquidity ratio or the SLR. This makes it mandatory for banks to maintain higher SLR or reserves, which in turn leads to banks and commercial lenders having less money to lend.
Therefore, banks start charging a higher rate of interest on credit when the SLR increases. This encourages loan applicants to borrow money only when necessary, which eventually leads to a reduced flow of funds within the economy and inflation to come down eventually on its own. On the other hand, when the economy needs a push, the Reserve Bank of India reduces the current SLR rate, which increases the flow of funds within the economic system, thereby giving a push to economic growth.
The Reserve Bank of India decides the SLR Rate, which can go as high as 40%. Currently, the SLR rate is 18%.
Statutory Liquidity Ratio and Home Loans
If you are planning to avail a home loan, you must understand how SLR and any changes in it will affect your home loan interest rates. Home loan interest rates are low when the SLR is low. When the RBI increases the SLR, the home loan interest rates increase too.
Other than the SLR ratio, changes in the Repo Rate and Bank Rate also affect the home loan interest rates. The Bank Rate is the minimum base rate at which a bank can extend credit to a loan borrower. The Repo Rate, on the other hand, is the rate of interest that the Reserve Bank of India charges when it lends money to scheduled banks by accepting government-approved securities as collateral.
Securing a low-interest-rate home loan becomes easier when you have a high credit or CIBIL score and are applying for a home loan that you are eligible for. Further, opting for a low LTV ratio loan by paying a high down payment also makes negotiating for low interest rates easier. What makes it equally easier for people to secure a low-interest-rate home loan is maintaining a stable income and job and having a low debt-to-income ratio or FOIR.
Home loans can bring people one step closer to their dream of owning a home. However, these long-term and big-ticket loans must also be availed of when one is fully and financially prepared for the responsibility.
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