Understanding Statutory Liquidity Ratio and Its Impact on Home Loan Rates

In the banking system, maintaining liquidity is crucial to ensure stability and meet the financial obligations of depositors. The Statutory Liquidity Ratio (SLR) is a mandated percentage of a bank's total deposits that must be held in the form of liquid assets like government securities, bonds, and other approved securities. However, this requirement can impact the amount of money available for lending, and as a result, affects the interest rates on loans, especially on home loans.

What is Statutory Liquidity Ratio (SLR)?

Banks are obligated to keep a certain percentage of their deposits as liquid assets, which includes government securities, bonds, and other approved securities. This percentage is known as the Statutory Liquidity Ratio (SLR), and it is mandated by the Reserve Bank of India (RBI) to ensure financial stability and liquidity in the banking system. As per RBI guidelines, banks must maintain an SLR of 18% of their net demand and time liabilities (NDTL).

Impact of SLR on Home Loan Rates

The need for banks to maintain a specific proportion of their deposits as liquid assets limits the amount of money available for lending. This, in turn, results in higher borrowing costs, leading to increased home loan interest rates. Banks often hike loan interest rates to offset the impact of SLR requirements on liquidity.

In addition to SLR, other factors, including inflation, repo rate, and market conditions, also have an impact on home loan interest rates. However, SLR is a crucial factor that banks need to consider when determining lending rates.

Tax Benefits on Joint Home Loans

A joint home loan is when two or more individuals take a loan to purchase a property. In such instances, all co-borrowers are eligible to claim tax benefits under the Income Tax Act, 1961, for both principal and interest repayments.

Under Section 80C of the Income Tax Act, co-borrowers can claim a deduction of up to Rs. 1.5 lakhs on the principal repayment. Furthermore, under Section 24 of the Income Tax Act, co-borrowers can claim a deduction of up to Rs. 2 lakhs on the interest repayment. If the property is self-occupied, co-borrowers can collectively claim a total deduction of up to Rs. 3.5 lakhs.

Additionally, in cases of joint ownership of the property, co-borrowers can each claim a deduction of up to Rs. 1.5 lakhs on the municipal taxes applicable to the property, as per Section 24.

Benefits of a Joint Home Loan

In addition to the tax benefits, there are various other advantages of availing a joint home loan. Let's have a look at a few of them:

• With a joint home loan, the lender considers the income of all co-borrowers to determine the loan eligibility, enabling borrowers to obtain a higher loan amount. This is particularly advantageous for individuals with lower individual incomes.

• Lenders often offer lower interest rates for joint home loans than for individual home loans. This is because the combined income of all co-borrowers lowers the risk for the lender.

• When co-borrowers jointly own the property, they share the financial responsibility of repaying the loan. This means that the burden of loan repayment is distributed among all co-borrowers, reducing the financial stress on any one person.

Conclusion

To sum up, the Statutory Liquidity Ratio has a significant impact on home loan interest rates. Although various factors influence the interest rate, banks are required to keep a specific percentage of their deposits as liquid assets. This reduces the amount of money available for lending, causing an increase in the cost of borrowing and leading to higher home loan interest rates.