Statutory liquidity ratio
(SLR)
Statutory
liquidity ratio refers to the amount that the commercial
banks require to maintain in the form of gold or government 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. It is determined as % of total demand and time
liabilities. Time Liabilities refer to the liabilities, which the commercial
banks are liable to pay to the customers after a certain period mutually agreed
upon and demand liabilities are such deposits of the customers which are payable
on demand. The maximum limit of SLR is 40% and minimum limit of SLR is 23% In
India.
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.
The main
objectives for maintaining the SLR ratio are the following:
1)
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.
2)
To ensure the solvency of commercial
banks.
3)
To compel the commercial banks to
invest in government securities like government bonds.
Formula for Calculating SLR in India: SLR
rate = (liquid assets / (demand + time liabilities)) × 100%
How does SLR
affect economy?
Lower SLR, means bank can
give more money as loan = lower interest rates = cheap loan = more people take
loan to start business or building house or buying car = boost in economy. This
could to inflation, if people have more cash in their hands than the items
available for purchase in the market.
Higher SLR =
bank can give less money as loan = Higher interest rate = it becomes expensive
to start a new factory, buy a new house / car/bike. This can curb inflation but
may also lead to slowdown in economy, because people wait for the interest
rates to go down, before taking loans.