SLR (Statutory Liquidity Ratio)

The portion of total deposit which a commercial bank has to keep with itself in liquid assets is known as the Statutory Liquidity Ratio (SLR). It is a requirement set by the central bank of a country, such as the Reserve Bank of India (RBI), to ensure the stability and liquidity of the banking system. The SLR is expressed as a percentage of a bank's total demand and time liabilities (deposits).

Importance of SLR
- Ensures Liquidity: The SLR ensures that banks have sufficient liquid assets to meet their obligations and handle any sudden withdrawal demands from customers.
- Maintains Financial Stability: By maintaining a certain level of liquid assets, banks are able to withstand financial shocks and maintain stability in the banking system.
- Controls Credit Expansion: The SLR acts as a tool to control the credit expansion by commercial banks. By increasing the SLR, the central bank can restrict the lending capacity of banks, thereby controlling inflationary pressures in the economy.
- Encourages Investment in Government Securities: The SLR requires banks to hold a certain percentage of their deposits in the form of government securities. This encourages investment in these securities, which helps finance government expenditures and reduces the reliance on borrowing from the central bank.

Calculation of SLR
The SLR is calculated based on a bank's total demand and time liabilities. The RBI sets the SLR percentage, which can vary over time. For example, if the SLR is set at 20%, it means that a bank must maintain liquid assets equivalent to at least 20% of its total deposits.

Types of Liquid Assets
The liquid assets that can be considered for meeting the SLR requirement include:
- Cash in hand
- Gold
- Government securities

Penalty for Non-Compliance
If a commercial bank fails to maintain the required SLR, it can face penalties imposed by the central bank. These penalties may include fines or restrictions on certain banking activities.

Conclusion
SLR is an important tool used by central banks to ensure the stability and liquidity of the banking system. By requiring commercial banks to maintain a certain percentage of their deposits in liquid assets, the SLR helps maintain financial stability, control credit expansion, and encourage investment in government securities. Compliance with the SLR is crucial for commercial banks to avoid penalties and maintain a healthy banking system.