Statutory Liquidity Ratio (SLR)

Reviewed by Sweta | Updated on Sep 28, 2020

Introduction

Statutory Liquidity Ratio (SLR) is one of the important financial ratios followed by the banking system. A bank is required to pay back the deposited money to the customers. The public deposits form part of a bank’s net demand and time liabilities. The statutory liquidity ratio requires a bank to keep a percentage of such liabilities in liquid form as prescribed by the Reserve Bank of India (RBI).

Understanding Statutory Liquidity Ratio

Statutory liquidity ratio is a minimum percentage prescribed by RBI from time to time. The RBI regulates the SLR in its policy meetings with a view to keep a check on inflation and credit growth. An increase in SLR will help in containing inflation, while a decrease in SLR will facilitate economic growth.

SLR is prescribed under the Banking Regulation Act, 1949. It helps in maintaining and keeping a check on the solvency of commercial banks. In a case of falling demand and slowing economic growth, SLR is cut to infuse more liquidity in the economy, facilitating loan growth. A cut in SLR means banks have to keep less money in liquid form with RBI.

SLR requirements are applicable to public sector banks, private banks, co-operative banks, and all entities coming within the purview of banking regulation Act. A bank which fails to maintain the SLR requirements is considered a defaulter and penalised with a 3% penalty above the bank rate.

Banks are required to communicate their time and demand liabilities along with SLR fortnightly (Friday). A continuous default in maintaining SLR attracts a 5% fine by RBI.

Conclusion

The lending and deposit rates depend on SLR. In case the demand and consequent inflation are high, the SLR is increased to bring down the money availability and demand, consequently inflation. SLR also helps banks to meet their deposit redemption requests by maintaining a certain portion of time and demand liabilities in liquid form.

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