The government takes several measures under the monetary policy to control the overall credit flow within its economy. Individuals who are curious to know how the government succeeds in this aspect need to be aware of what SLR is. Its full form is statutory liquidity ratio. Through the revision of SLR, the government influences the commercial financial institutions’ capacity of lending and thereby restricts or encourages the domestic flow of capital. Individuals need to know why and how this happens.
What is SLR?
The statutory liquidity ratio (SLR) is the minimum portion of a commercial financial institution’s total deposits that it needs to keep separately in cash, government securities, and gold. What is SLR? The Reserve Bank of India is the governing body that exercises the revision in this rate as necessary, considering the overall capital flow in the economy.
As per Section 24(2A) of the Banking Regulations Act, Indian commercial financial institutions need to obligatorily keep this reserve separate from their operations and report about it to the RBI on a fortnightly basis.
Components of SLR
Following are the two components of the statutory liquidity ratio:
- Net Demand and Time Liabilities: Net Demand and Time Liabilities (NDTL) denote the total liabilities of financial institutions. It consists of demand and time liabilities. Demand liabilities include bank savings, current deposits, demand drafts, overdue fixed deposits, etc. On the other hand, time deposits contain different deposits that come with a certain maturity period, including fixed deposits, certificates of deposits, etc.
- Liquid assets: Liquidity assets are cash reserves and instruments that financial institutions can easily convert into physical cash, such as gold, treasury bills, and government bonds and securities.
Both these components are the factors considering which the RBI calculates the total SLR obligations of financial institutions.
How does SLR impact the banking system?
Besides understanding what SLR is, individuals must also have a clear idea of how this ratio impacts the overall business of financial institutions.
The SLR is a key instrument of monetary policy that aims to directly control the overall flow of credit. When this ratio becomes high, financial institutions need to keep a large amount of credit in the form of gold, physical cash, and government securities. It limits their capacity to lend out money to their customers.
To increase their profitability despite the harsh situation of increased SLR, financial institutions increase the applicable interest rate of financial products. It leaves an indirect impact on decreasing the overall flow of credit in the economy to a large extent.
Individuals can witness a decrease in the applicable interest rate of secured and unsecured credit when the RBI lowers this statutory liquidity ratio. This is because, when this ratio stays low, financial institutions get more capital for lending.
Individuals looking for a home loan to meet their capital shortage can stay at an advantageous point by knowing aspects that influence interest rates.
Factors that influence home loan interest rate
Following are some aspects that influence the interest rate on a home loan:
- Loan tenor: When individuals choose a shorter repayment period, financial institutions can fix a low-interest rate. This is because lenders get back their money in a short duration.
- Location of property: Houses from a posh location have higher resale value. Those properties are relatively less risky for lenders as they can liquidate them easily in case of non-repayment of a loan. For this reason, individuals intending to build a house in such locations can secure a home loan at a low interest rate.
- Credit score: Usually, credit score is not a part of home loan eligibility criteria. Still, while determining the interest rate, lenders check this score to know the creditworthiness of applicants. Individuals with a ‘good’ credit score can secure an attractive home loan interest rate.
Things to check while applying for a home loan
Here are some aspects individuals should ideally check while applying for a home loan:
- Instalment amount: Individuals need to ensure that the instalment amount of their loan is within their capacity. Otherwise, it will be difficult for them to repay. They can use a home loan calculator during the application process of the credit to know the amount.
- Pre-approved offers: Some lenders extend pre-approved offers to their existing customers. By accepting these offers, individuals can get the credit at a less turn-around time. However, they need to wait for the property verification process for a home loan. Eligible customers just need to enter their names and contact details to check their pre-approved offers.
- Interest rate and other charges: The interest rate and different charges like processing fees and stamp duty are aspects that increase the borrowing cost. Individuals need to ideally compare these factors to identify the lender that levies lower interest rates and charges.
- Dedicated portal: It is also better if the lender has a dedicated portal from where customers can apply for loans, check pre-approved offers, and download home loan NOC and other documents after loan repayment. As a result, they can avoid visiting the office of their lenders for small requirements.
It is necessary to know what SLR is to understand how the government manages credit flow within its economy by changing this ratio. With an increase in SLR, commercial financial institutions get an obligation to keep more money as a reserve, which limits their capacity to lend. In this situation, they charge a high interest rate on their financial products to maintain their profitability.