Essay On Statutory Liquidity Ratio

Statutory liquidity ratio is another important question frequently asked in IAS exams. The question in the preliminary exam will be asked in a way to confuse you.

First, understand the meaning of the words in SLR.

“Statutory” means by law or by regulation. “Statute” simply means law. So SLR is legally enforceable and is mandatory for banks to follow. Now, ask me, which law? It is Banking regulation Act, 1949.

Second, understand the meaning of “Liquidity”. Liquidity means how fast you can convert an asset to cash. Say, you have 1 kg of Gold and you want to sell it and take cash! It can be done easily and in less time. So, gold is an liquid asset. If you want to sell your land, it doesn’t happen quickly. Hence, land cannot be called a liquid asset or at most it can be called less liquid. Even, currency or cash is seen as liquid asset.

For banks, liquid assets include cash, gold and

Banks get Time and demand deposits (or simply deposits) from the public. If I deposit Rs 100 in State Bank of India and RBI has fixed 20% as SLR, then banks should not give away that 20% in the form of lending or loans. They should keep with themselves in their own trunk boxes ( Remember: It is not with RBI they keep like in CRR) that 20% of deposits in the form of cash or gold. Also, banks can invest in bonds that are mentioned above.

Difference between SLR and CRR

These two may seem same but there is a difference. SLR is maintained or kept by banks themselves. Banks don’t have to keep the cash or gold with RBI. They set aside the net or time deposits they get from public with themselves and not use it. However, they can invest in Bonds. While in CRR, banks have to keep the cash ( according to the CRR ratio fixed by RBI) only with RBI and not with themselves.

Also, SLR can be maintained in any liquid form - in the form of cash, gold or investment in bonds. But CRR has to be kept with RBI only in cash form and not in any other form of liquid