Statutory liquidity ratio (SLR)

Statutory liquidity ratio (SLR) refers amount that the commercial banks require to maintain in the form of gold or govt. approved securities before providing credit to the customers. Here by approved securities we mean, bond and shares of different companies. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit.

It is determined as percentage of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand. Example of time liability is a fixed deposits for 6 months, which is not payable on demand but after six months. example of demand liability is deposit maintained in saving account or current account, which are payable on demand through a withdrawal form of a cheque.

SLR is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved liabilities (deposits). It regulates the credit growth in India.

The liabilities that the banks are liable to pay within one month's time, due to completion of maturity period, are also considered as time liabilities. 

The main objectives for maintaining the SLR ratio are the following:

• To control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.
• To ensure the solvency of commercial banks.
• To compel the commercial banks to invest in government securities like government bonds.