Definition: The Statutory Liquidity Ratio (SLR) refers to the proportion of deposits the commercial bank is required to maintain with them in the form of liquid assets in addition to the cash reserve ratio.
In the definition, the liquid assets are the assets readily convertible into cash, includes government bonds, or government approved securities, gold, and cash reserve. The objective of statutory liquidity ratio is to prevent the commercial banks from liquidating their liquid assets during the time when CRR is raised.
The statutory liquidity ratio is determined by the central bank as the percentage of total demand and time liabilities. The time liabilities refer to the liabilities of a bank which is to be paid to the customer anytime the demand arises and are the deposits of the customers which are to be paid on demand.
The statutory liquidity ratio is determined and maintained by the central bank to control the bank credit, ensure the solvency of commercial banks and compel banks to invest in the government securities. By changing the SLR, the flow of bank credit in the economy can be increased or decreased. Such as, when the central bank decides to curb the bank credit so as to control the inflation will raise the SLR. On the contrary, when the economy faces recession, and the central bank decides to increase the bank credit will cut down the SLR.
A penalty at a rate of 3% per annum above the bank rate is imposed if any commercial bank fails to maintain the statutory liquidity ratio. Further, a penalty at a rate of 5% per annum above the bank rate is imposed on a defaulter bank if it continues to default on the next working day. The central bank imposes such a restriction on the commercial banks so that the funds are readily made available to the customers on their demand.
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