statutory liquidity ratio

Definition
SLR. The amount of liquid assets, such as cash, precious metals or other short-term
securities, that a financial institution must maintain in its reserves. The statutory liquidity ratio
is a term most commonly used in India


Statutory Liquidity Ratio
refers to the amount that the commercial banks require to maintain in the form of cash, or
gold or govt. approved securities before providing credit to the customers.

Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order
to control the expansion of bank credit.


Statutory Liquidity Ratio or SLR refers to the amount that all banks require maintaining in
cash or in the form of Gold or approved securities. Here by approved securities we mean,
bond and shares of different companies.
Statutory Liquidity Ratio
is determined as percentage of total demand and percentage of time liabilities. Time
Liabilities refer to the liabilities, which the commercial banks are liable to pay to the
customers on there anytime demand. The liabilities that the banks are liable to pay within
one month's time, due to completion of maturity period, are also considered as time
liabilities. The maximum limit of SLR is 40% and minimum limit of SLR is 24%.

In India, Reserve Bank of India always determines the percentage of Statutory Liquidity
Ratio. There are some statutory requirements for temporarily placing the money in
Government Bonds. Following this requirement, Reserve Bank of India fixes the level of
Statutory Liquidity Ratio. At present, the minimum limit of Statutory Liquidity Ratio that can
be set by the Reserve Bank is 25%.
The main objectives for maintaining the Statutory Liquidity Ratio are the following:

Statutory Liquidity Ratio is maintained in order to control the expansion of Bank Credit. By
changing the level of Statutory Liquidity Ratio, Reserve bank of India can increase or
decrease bank credit expansion.

Statutory Liquidity Ratio in a way ensures the solvency of commercial banks.

By determining Statutory Liquidity Ratio, Reserve Bank of India, in a way, compels the
commercial banks to invest in government securities like government bonds.

If any Indian Bank fails to maintain the required level of Statutory Liquidity Ratio, then it
becomes liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal
interest at the rate of 3% per annum above the Bank Rate, on the shortfall amount for that
particular day. But, according to the Circular, released by the Department of Banking
Operations and Development, Reserve Bank of India; if the defaulter bank continues to
default on the next working day, then the rate of penal interest can be increased to 5% per
annum above the Bank Rate. This restriction is imposed by RBI on banks to make funds
available to customers on demand as soon as possible. Gold and Government Securities (or
Gilts) are included along with cash because they are highly liquid and safe assets.

The RBI can increase the Statutory Liquidity Ratio to contain inflation, suck liquidity in the
market, to tighten the measure to safeguard the customers money. In a growing economy
banks would like to invest in stock market, not in Government Securities or Gold as the latter
would yield less returns. One more reason is long term Government Securities (or any bond)
are sensitive to interest rate changes. But in an emerging economy interest rate change is a
common activity