Statutory Liquidity Ratio

Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. These are not reserved with the Reserve Bank of India (RBI), but

with banks themselves. The SLR is fixed by the RBI. CRR (Cash Reserve Ratio) and SLR have been the traditional tools of the central bank's monetary policy to control credit growth, flow of liquidity and inflation in the economy. The SLR was prescribed by Section 24 (2A) of Banking Regulation Act, 1949.

The government uses the SLR to regulate inflation and liquidity. Increasing the SLR will control inflation in the economy while decreasing it will cause growth in the economy. Although, the SLR is a monetary policy instrument of RBI, it is important for the government to make its debt management programme successful. SLR has helped the government to sell its securities or debt instruments to banks. Most of the banks will be keeping their SLR in the form of government securities as it will earn them an interest income.

SLR refers to the proportion of deposits the commercial bank is required to maintain with them in the form of liquid assets in addition to the cash reserve ratio.

In the definition, the liquid assets are the assets readily convertible into cash, includes government bonds, or government approved securities, gold, and cash reserve. The objective of statutory liquidity ratio is to prevent the commercial banks from liquidating their liquid assets during the time when CRR is raised.

The statutory liquidity ratio is determined by the central bank as the percentage of total demand and time liabilities. The time liabilities refer to the liabilities of a bank which is to be paid to the customer anytime the demand arises and are the deposits of the customers which are to be paid on demand.

The statutory liquidity ratio is determined and maintained by the central bank to control the bank credit, ensure the solvency of commercial banks and compel banks to invest in the government securities. By changing the SLR, the flow of bank credit in the economy can be increased or decreased. Such as, when the central bank decides to curb the bank credit so as to control the inflation will raise the SLR. On the contrary, when the economy faces recession, and the central bank decides to increase the bank credit will cut down the SLR.

A penalty at a rate of 3% per annum above the bank rate is imposed if any commercial bank fails to maintain the statutory liquidity ratio. Further, a penalty at a rate of 5% per annum above the bank rate is imposed on a defaulter bank if it continues to default on the next working day. The central bank imposes such a restriction on the commercial banks so that the funds are readily made available to the customers on their demand.

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