As a statutory obligation under Section 24 (b) of the Banking Regulation Act, 1949, every bank has to keep a fixed minimum portion of their Net Demand (savings account) and Time (fixed deposits) Liabilities (NDTLs) aside at the end of every day.
The SLR can be in the form of cash, gold or bonds issued by the government (a financial instrument for which the government pays a fixed rate of interest to the buyer).
While demand deposits can be withdrawn any time without giving any prior notice, time deposits need a notice period for their withdrawal.
The SLR is always expressed as a percentage of the NDTL. If a bank’s NDTL is Rs 100 on January 31 and the SLR fixed by the RBI is at 20%, then that bank has to either keep Rs 20 aside or invest it in gold, bonds or both. This means that only Rs 80 will be available to the bank for its lending operations.
The savings account deposits as well as fixed deposit amount that we deposit in a bank are the bank’s liabilities. The SLR as of today stands at 25% and the RBI has the authority to increase it to a maximum of 40%.
Any reduction in the SLR level increases the amount of money available with banks for lending to individuals, companies or other banks. Any hike in the SLR has the opposite effect.
How this affects us: A reduction in SLR, ideally, means you should have to pay a cheaper rate of interest on your loans and vice versa.
Is this how banks make money?? Also why does SLR affect loan rates to common ppl??
Banks make money by giving loans to people.
They can’t make huge amount of money by investing in gold and government bonds. The government bonds generally yeild around 5-6% per annum. Gold does not fluctuate very much and hence banks don’t invest huge amounts in the gold commodity.
SLR affects the bank which inturn affects the common man. RBI decides as to how much money should be in the banking system. More the money, lesser the interest and vice versa (I hope you understand this). If RBI increases the SLR then banks have to deposit huge amounts in gold and bonds and this inturn will lead to shortage of money there by loans are provided at a high interest rate for the common people for the loan.