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What is Statutory Liquidity Ratio (SLR)?
Statutory Liquidity Ratio
Statutory Liquidity Ratio or SLR is a 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. These are not reserved with the Reserve Bank of India (RBI), but with banks themselves. The SLR is fixed by the RBI. CRR (Cash Reserve Ratio) and SLR have been the traditional tools of the central bank's monetary policy to control credit growth, flow of liquidity and inflation in the economy. The SLR was prescribed by Section 24 (2A) of Banking Regulation Act, 1949.
Importance of SLR
The government uses the SLR to regulate inflation and liquidity. Increasing the SLR will control inflation in the economy while decreasing it will cause growth in the economy. Although, the SLR is a monetary policy instrument of RBI, it is important for the government to make its debt management programme successful. SLR has helped the government to sell its securities or debt instruments to banks. Most of the banks will be keeping their SLR in the form of government securities as it will earn them an interest income.
Difference between SLR and CRR
Cash Reserve Ratio is the percentage of the deposit (NDTL) that a bank has to keep with the RBI. CRR is kept in the form of cash and that also with the RBI. No interest is paid on such reserves.
On the other hand, SLR is the percentage of deposit that the banks have to keep as liquid assets in their own vault.
The CRR is a more active and useful monetary policy tool compared to the SLR. Usually, the RBI changes CRR to manage liquidity in the economy.
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