The Reserve Bank of India governs all commercial banks and lenders within the country and as per one of the RBI guidelines, all banks and commercial lenders operating within the country must maintain a certain portion of their time and demand deposits in the form of liquid assets before they can start lending out money to borrowers. Lenders must maintain this deposit within their vaults. Statutory Liquidity Ratio, also often referred to as SLR, is the percentage of a bank or commercial lender’s total demand and time deposits that it must keep aside in the form of cash, gold or other liquid assets. 

Now that we understand the meaning of SLR, let us look at why this concept is important and what purpose it serves for the RBI and the Indian economy. 

1. The most important reason why the RBI asks borrowers to maintain SLR  is that it helps maintain the financial stability of the Indian banking sector. 

2. Through Statutory Liquidity Ratio, the RBI ensures that banks and commercial lenders are investing in government securities. 

3. With the help of SLR, the RBI also helps maintain economic growth within the country. 

From the perspective of home loan borrowers, the third point is the most important. Changes in SLR directly impact the home loan interest rates. When the Reserve Bank of India increases the SLR, banks and commercial lenders have less money to lend and therefore, they charge a higher interest rate on all loans, including home loans. Thus, when the RBI increases the SLR, home loans become expensive. On the other hand, when the RBI decreases the SLR, lenders have surplus funds and therefore, they lend money at a low rate of interest. Thus, when the RBI reduces the SLR, all loans become cheap. 

It is thus that anyone planning to avail themselves of a loan must keep track of changes in the SLR.

The current Statutory Liquidity Ratio is 18%. Borrowers must know that the RBI holds the right to increase the SLR to up to 40%.

Borrowers planning to avail themselves of a home loan must, other than SLR, also keep themselves apprised about the Repo Rate. Repo Rate is the rate at which the Reserve Bank of India lends money to commercial lenders and banks within the country. All commercial lenders add a spread to the Repo Rate and that is the rate of interest they charge on loans from borrowers. The spread is higher in the case of unsecured loans and lower in the case of secured loans. Since most loans these days are linked to the Repo Rate, any changes in the Repo Rate have a direct effect on one’s loan EMIs. The RBI has the right to change the Repo Rate once every three months. During the COVID-19 pandemic, the RBI changed the Repo Rate multiple times to curb inflation and promote economic growth within the country. However, the SLR has remained unchanged since 2018. 

In conclusion, the Statutory Liquidity Ratio is an important policy tool that the RBI uses effectively and borrowers must also track changes in SLR, other than the Repo Rate, as any changes in the SLR also have a direct impact on borrowers.