All banks and other financial institutions in India are required to maintain an amount in the form of liquid assets such as G secs, precious metals, approved securities etc. as a percentage of their total Demand and Time Liabilities (DTL) / Net DTL (NDTL).
Approved securities— Bond and shares of different companies.
The SLR requires holding of assets in one of the following three categories by the bank itself.
[a] cash; or
[b] gold as defined in Section 5(g) of Banking Regulation Act, 1949 valued at a price not exceeding the current market price: or
[c] unencumbered investment in any of the following instruments [hereinafter referred to as Statutory Liquidity Ratio securities (“SLR securities”)], namely—
 Dated securities of the Government of India issued from time to time under the market borrowing programme and the Market Stabilization Scheme ; or
 Treasury Bills of the Government of India; or
 State Development Loans (SDLs) of the State Governments issued from time to time under the market borrowing programme.
If a bank fails to meet its SLR obligation, a penalty in the form of a penal interest payable is imposed.
The banks can earn some amount as ‘interest’ on these investments.
Usage of SLR—
 SLR is used to control the expansion of bank credit.
 By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.
 SLR compels the commercial banks to invest in government securities like government bonds.
 To fight inflation SLR is increased.
 To fight deflation SLR is decreased.
Effects of SLR on economy—
When SLR is increased—
 Cash reserves of commercial banks decreases.
 Rate of interest increases.
 Demand for credit decreases.
 Credit contracts.
When SLR is decreased—
 Cash reserves of commercial banks increases.
 Rate of interest decreases.
 Demand for credit increases.
 Credit expands.