Statutory Liquidity Ratio - SLR

In this article, the Statutory Liquidity Ratio(SLR) has been discussed in details. Apart from SLR, there are terms like CRR, bank rate, the repo rate, reverse repo rate, etc. are very important for the economy section of the IAS exam.

The General Awareness section for UPSC exams covers a very vast syllabus which not just includes information related to History, static general awareness, current events across the world, but also includes questions related to the economy. 

Aspirants can check the previous years’ UPSC question papers to have clarity on this topic.

Statutory Liquidity Ratio -Definition

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 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 inflation in the economy while decreasing the statutory liquidity rate will cause growth in the economy. The SLR was prescribed by Section 24 (2A) of Banking Regulation Act, 1949.

To know more about various banking reforms and acts, check the linked article.

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.

SLR plays a very important role in fixing the minimum rate at which a bank can lend money to its customers. This minimum amount is called the base rate. This helps in building transparency between the Reserve Bank of India and other public dealing banks.

The Reserve Bank of India is the body which sets the SLR. The Reserve Bank of India increases the SLR at the time of inflation to control bank credit. At the time of recession, RBI decreases the SLR to increase bank credit.

Aspirants can check the UPSC syllabus at the linked article.

Current Statutory Liquidity Ratio

The current statutory liquidy ratio as of August 2020 is 18.50%. 

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