Important economic terms are asked directly or indirectly in the UPSC exam. In this article, SLR is discussed. Along with this, terms like CRR, bank rate, repo rate, reverse repo rate, etc. are very important for the economy section of the IAS exam.
Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to the customers. The SLR is fixed by the RBI and is a form of control over the credit growth in India.
The government uses the SLR to regulate inflation and fuel growth. Increasing the SLR will control the inflation in the economy while decreasing the statutory liquidity rate will cause growth in the economy. The SLR was prescribed by the Section 24 (2A) of Banking Regulation Act, 1949.
Why is the SLR fixed?
- To check the expansion of bank credit.
- To ensure the solvency of commercial banks.
- To compel banks to invest in government securities like bonds.
- To fuel growth and demand; this is done by decreasing the SLR so that there is more liquidity with the commercial banks.
If a bank fails to maintain the prescribed SLR, it is liable to pay a penalty to the Reserve Bank of India. The defaulter bank has to pay a penalty of 3% above the bank rate on the deficient amount for that particular day.
Statutory Liquidity Ratio Rate
The current SLR is 19.5% p.a. The maximum that the RBI can prescribe is 40% p.a.