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Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or government approved securities before providing credit to the customers.  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 % 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.

The eligible assets for SLR mainly include cash, gold and approved securities by the RBI. Most banks keep the SLR in the form of approved securities specifically –central government bonds and treasury bills as they give a reasonable return.

As per December 10, 2015 notification by the RBI, for Scheduled Commercial Banks, the SLR should be in the form of:

a) in cash, or

b) in gold valued at a price not exceeding the current market price, or

(c) Unencumbered investment in any of the following instruments, namely:-

(1) Dated securities of the Government of India or

(2) Treasury Bills of the Government of India; or

(3) State Development Loans (SDLs) of the State Governments

(d) The deposit and unencumbered approved securities required to be made with the Reserve Bank by a banking company incorporated outside India;

(e) Any balance maintained by a scheduled bank with the Reserve Bank in excess of the balance required to be maintained by it under section 42 of the Reserve Bank of India Act.

 

                                                         objectives for maintaining the SLR ratio 
1. 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.
2. To ensure the solvency of commercial banks.
3. To compel the commercial banks to invest in government securities like government bonds.
                                                               Formula for Calculating SLR 
 SLR rate = (liquid assets / (demand time liabilities)) × 100%
Lower SLR, means bank can give more money as loan = lower interest rates = cheap loan = more people take loan to start business or building house or buying car = boost in economy. This could to inflation, if people have more cash in their hands than the items available for purchase in the market.
Higher SLR = bank can give less money as loan = Higher interest rate = it becomes expensive to start a new factory, buy a new house / car/bike. This can curb inflation but may also lead to slowdown in economy, because people wait for the interest rates to go down, before taking loans.
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