The Reserve Bank of India is the central bank of the country and among other things, one of its key responsibilities is ensuring sustained economic growth within the country. The Reserve Bank of India has at its disposal several different tools that allow it to maintain economic growth within the country and help keep inflation within control. One such tool is the statutory liquidity ratio.
What is Statutory Liquidity Ratio?
Statutory Liquidity Ratio refers to the minimum ratio of the total deposits that a bank must keep safe in the form of cash or gold or government-approved securities. As per the RBI mandate, commercial banks; central, state and urban commercial banks; and local area banks must maintain an SLR rate. Further, most people assume that banks within the country are supposed to keep safe their SLR with the Reserve Bank of India but that’s not the case. All banks must maintain an SLR with themselves.
Since we are on the topic of SLR, we must also familiarize ourself with the concept of Net Demand and Time Liabilities or NTDL. NDTL refers to the total demand and deposits of its customers that a bank holds with other banks.
How is Statutory Liquid Ratio and Net Demand and Time Liabilities Calculated?
Statutory Liquidity Ratio is calculated using this formula.
SLR = (Liquid Assets/ Net Demand Time Liabilities) * 100
Let us understand this with an example. Let us assume that a bank’s liquid assets are worth Rs.25 Crore and their NTDLs are worth Rs.250 Crore. In this case, the Statutory Liquidity Ratio would be:
SLR= (25 Crore/250 Crore)×100
Thus, in this case, the Statutory Liquidity ratio would be 10%.
If one wants to calculate SLR, they must also know how to Calculate the NTDL. So, here’s the formula to calculate the NTDL.
NDTL = Demand and time liabilities i.e. deposits – deposits with other banks
Let us also understand this with an example. Let us assume that a bank has deposited Rs.250 Crore with other banks and its own Demand and Time liabilities are Rs.500 Crore. In this case, the NTDL would be:
NTDL= Rs.500 Crore- Rs.250 Crore
i.e. Rs.250 Crore.
Let us now understand how does the Reserve Bank of India use the concept of SLR to maintain economic growth within the country.
Why does the RBI increase or reduce the Statutory Liquidity Ratio or SLR and How Do These Changes Affect Home Loan Interest Rates?
When the inflationary pressure within the country increases and the prices of daily,use things begin to go up, it becomes difficult for the lower-income groups and middle-class people to afford things. When this happens, the RBI intervenes and increases the Statutory Liquidity Ratio. When the Statutory Liquidity Ratio goes up, banks must maintain a higher amount of deposits. This leads to banks having less money to lend and therefore, they start charging a higher rate of interest. This reduces the flow of money within the economy and eventually the prices of things come down and the inflationary pressures begin to go down too.
On the other hand, when the inflationary pressures within the economy go down, the RBI reduces the SLR. With the SLR going down, banks have more money to give and therefore, they reduce the interest rate they charge on loans. This is the reason why when the RBI reduces the SLR, home loans become cheaper and when the RBI increases the SLR, all loans, including home loans become expensive.
A Few Important Tips for Home Loan Borrowers
Home loan borrowers must keep themselves well-informed about the statutory liquidity ratio as it directly impacts their EMIs and the total interest outgo. Currently, the SLR is 18%. However, the Reserve Bank of India can increase the SLR to 40%. Other than keeping themselves apprised about the SLR, home loan borrowers must also keep the following things in mind.
– If you are planning to avail of a home loan in near future, do thorough research and try and get the lowest home loan interest rate possible. This is crucial to ensure affordable EMIs and reduced interest outgo in the long run.
– If you are already repaying a home loan and your current lender is charging you a high rate of interest, you can benefit from opting for a home loan balance transfer. Using this facility, you can transfer your home loan from your current lender to another offering lower home loan interest rates.
– If you are planning to apply for a home loan in near future, know that it is crucial that you apply only if you meet your lender’s home loan eligibility requirements. If you do not meet the qualifying criteria and still apply for a loan, your application will get rejected and your CIBIL score will go down, which will further reduce your chances of availing of a home loan in near future.
– Lastly, always use a home loan calculator. The calculator helps you understand what is the loan amount you can easily repay. Thus, a home loan calculator saves you from making any mistakes and therefore, all home loan borrowers about to initiate the home loan process must use the home loan calculator.
Final Words
A home loan is a long-term and big-ticket loan. The tenor for these loans can go up to 30 years. Therefore, all home loan borrowers must avail of these loans after careful consideration and planning. Further, home loan borrowers who are already repaying the loan must keep an eye on things, such as the Statutory Liquidity Ratio and the Repo Rate, as they directly impact a borrower’s EMIs and other things.
