Statutory liquidity ratio refers to minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash , gold or other securities as fixed by RBI. These deposits are not required to be reserved with the RBI, but are kept with bank themselves. SLR is an important monetary tool which is used by the Central bank to control credit growth, liquidity & inflation in the economy. If a bank fails to maintain the prescribed SLR, it is liable to pay a penalty to the Reserve Bank of India.
At present, the Statutory Liquidity Rate in India is fixed as 18.25 % . The RBI has set the maximum limit for SLR as 40%.
ASSETS ELIGIBLE UNDER SLR
The RBI has specified the liquid assets in which the banks have to invest to maintain their SLR, these are –
- in cash, or
- in gold valued at a price not exceeding the current market price, or
- Unencumbered investment in approved securities
Approved securities are those securities which are specified by RBI from time to time. For example, Treasury bills, Dated securities of government of India etc.
OBJECTIVES OF STATUTORY LIQUIDITY RATIO
- The statutory liquidity ratio helps in curbing the situation of inflation or deflation. The Reserve Bank of India raises SLR to control the bank credit during the time of inflation. Similarly, it decreases the SLR during the time of deflation to increase the bank credit.
- SLR plays a very important role in fixing the minimum rate known as base rate at which a bank can lend money to its customers.
- SLR is used by the RBI to control credit flow in the banks.
- It encourages banks to invest in government securities like bonds.
- It helps in controlling the supply of money in the economy
EFFECTS OF SLR ON INDIAN ECONOMY
A lower statutory liquidity ratio means that a bank will have more lending capacity to the borrowers for investment purposes. This will increase the flow of money in the economy ,
Similarly, a higher statutory liquidity ratio means that a bank will have less funds to lend to businesses or industries for investment purposes. This will decrease the money supply in the economy and control the situation of inflation.
Thus, in simple words Statutory Liquidity Ratio is the ratio of liquid assets like cash, gold etc to the demand and time liabilities. It can be considered as an important monetary policy tool used by RBI which helps in controlling the financial system in the economy.