Statutory Liquidity Ratio or SLR is a monetary policy tool introduced by the central bank to access the liquidity available at a financial institution’s disposal. The purpose behind it is to protect lending institutes from going insolvent. Apart from this, SLR also serves as a fiscal measure to regulate the currency flow in the market.
More details regarding what statutory liquidity ratio is are mentioned below:
What is SLR?
SLR or statutory liquidity ratio is a minimum percentage of liquid assets every financial institution needs to maintain as mandated by the Reserve Bank of India. This liquid asset can be anything ranging from cash, unencumbered investment in approved securities, or gold valued at a certain price, not above the current market price.
Also, lenders maintain this deposit with themselves and not with the regulatory body. The current SLR rate applicable as of 24 May 2022 is 18%, but this can fluctuate.
If RBI feels a need to reduce the amount of cash available in the economy, it can increase this rate and vice versa. However, it cannot be more than 40%.
The formula of SLR is {liquid asset / (demand + time liabilities)} X 100
What is the objective of the statutory liquid ratio?
After knowing what SLR is, one should also understand its objective. While the main reason behind setting a statutory liquid ratio is to control liquidity, other reasons include:
- It prevents lenders from liquidating their assets completely.
- It ensures financial institutions are investing in government securities.
- RBI can handle the credit flow in the market.
When the regulatory body increases SLR, lenders have a lesser amount to provide on credit. As a direct or indirect repercussion of this, the interest rate of loans, increase, be it home loans, education or others. So, fewer people opt for credit.
However, by controlling other factors that can decrease home loan interest, one can reduce the overall financial burden to compensate for the increased rate. The details are available below.
What are the factors that affect home loan interest rates?
Below are the factors that impact a home loan interest. Borrowers can manage these to ensure a reasonable rate for loan:
● Location and value of the property
The neighbourhood of the property and its price plays an important role in determining interest rates for a home loan. For example, a lender may charge a lower interest rate if it is a low-profile location or if the property has poor construction.
● Loan tenure and amount
Short loan tenure can fetch a lower rate of interest while longer ones more. Additionally, when an individual requires a larger loan, lenders often charge them higher interest because of the amount of risk involved.
● Credit score
A borrower’s credit score is another factor affecting home loan interest rates. When this credit score is good, lenders charge a lower interest rate since the borrower seems creditworthy. However, for bad credit scores, the case is the opposite.
So, when individuals try to apply for a home loan, they must ensure there is no outstanding debt and that the credit report is correct.
● Job security
A prospective borrower’s job security can greatly impact the interest rate. This is because having an unstable job means a high risk of loan default. So, lenders tend to charge a greater interest in these cases.
Apart from these, there are other ways borrowers can benefit, like seeking unique features. For example, many financial institutions provide pre-approved offers. Availing these makes one’s process of applying for a loan effortless and smooth. These offers are available on various products, including home loan and loan against property. To check their pre-approv ed offers, individuals just need to enter their name and contact details.
This is all borrowers need to know on SLR, what it is and its objectives. It is a reserve every financial institution needs to maintain to ensure its solvency and the proper cash flow in the economy. The percentage of this reserve is set by the RBI and regulated as per economy’s requirement.
