Q. When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points which of the following is likely to happen?

• India’s GDP growth rate increases drastically
• Foreign Institutional Investors may bring more capital into our country
• Scheduled Commercial Banks may cut their lending rates
• It may drastically reduce the liquidity to the banking system

Answer: (c) Scheduled Commercial Banks may cut their lending rates

Notes:

• Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits (ie. Net Demand and Time Liabilities (NDTL)) that a commercial bank must keep with itself.
• SLR is the percentage of deposits that banks are required to maintain in the form of liquid assets such as cash, gold, or government securities.
• The Reserve Bank of India is authorized to set SLR and change it with changing macroeconomic conditions.
• To keep bank credit under control, the Reserve Bank of India raises the SLR as inflation rises. During a recession, the RBI lowers the SLR to promote bank credit.
• A reduction in SLR frees up liquidity for banks, enabling them to lend more to borrowers. As a result, banks may lower their lending rates, making loans more affordable for businesses and individuals.
• The CRR (Cash Reserve Ratio) and SLR (Stock Liquidity Ratio) have long been used by central banks to limit credit growth, liquidity flow, and inflation in the economy.
• A bank is liable to pay a penalty to the Reserve Bank of India if it fails to maintain the prescribed SLR. On the deficient amount for that particular day, the defaulter bank must pay a penalty of 3% above the bank rate.
• The 2007 amendment to the Banking Regulation Act of 1949 removed the lower ceiling of SLR which implied it can be sr between 0-40% of NDTL of the banks.
• As of December 2021, the SLR is at 18.00% of the NDTL of the banks.

Difference between SLR and CRR