Statutory Liquidity Ratio (SLR)


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—

[1] Dated securities of the Government of India issued from time to time under the market borrowing programme and the Market Stabilization Scheme ; or

[2] Treasury Bills of the Government of India; or

[3] 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—

[1] SLR is used to control the expansion of bank credit.

[2] By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.

[3] SLR compels the commercial banks to invest in government securities like government bonds.

[4] To fight inflation SLR is increased.

[5] To fight deflation SLR is decreased.

 

Effects of SLR on economy—

When SLR is increased—

[1] Cash reserves of commercial banks decreases.

[2] Rate of interest increases.

[3] Demand for credit decreases.

[4] Credit contracts.

When SLR is decreased—

[1] Cash reserves of commercial banks increases.

[2] Rate of interest decreases.

[3] Demand for credit increases.

[4] Credit expands.