Inaugurated by IN-SPACe
ISRO Registered Space Tutor
S5-SA4-0340
What is the Statutory Liquidity Ratio?
Grade Level:
Class 8
Law, Civic Literacy, Economics, FinTech, Geopolitics, Personal Finance, Indian Governance
Definition
What is it?
The Statutory Liquidity Ratio (SLR) is a minimum percentage of deposits that commercial banks in India must hold as liquid assets. These liquid assets include cash, gold, and approved securities like government bonds. The Reserve Bank of India (RBI) sets this ratio to control the amount of money banks can lend.
Simple Example
Quick Example
Imagine your piggy bank has Rs 100. If your parents say you must always keep Rs 20 (20%) safe and not spend it, that Rs 20 is like the SLR. You can only spend or lend out the remaining Rs 80. Banks also keep a part of their deposits safe, as per RBI rules.
Worked Example
Step-by-Step
Let's say a bank receives total deposits of Rs 1,00,000 from its customers.
---
The RBI sets the SLR at 18%.
---
To calculate the amount the bank must hold as liquid assets, we multiply the total deposits by the SLR percentage: Rs 1,00,000 * 18/100.
---
This equals Rs 18,000.
---
So, the bank must hold Rs 18,000 in liquid assets (cash, gold, government securities) and cannot lend out this amount.
---
Answer: The bank must hold Rs 18,000 as per SLR.
Why It Matters
SLR helps keep banks stable and ensures they always have some money available for emergencies. Understanding SLR is important for anyone interested in banking, finance, or even becoming a financial journalist or an economist, as it impacts how much money circulates in the economy.
Common Mistakes
MISTAKE: Thinking SLR is the same as CRR (Cash Reserve Ratio). | CORRECTION: SLR includes cash, gold, and government securities, while CRR only refers to cash held with the RBI.
MISTAKE: Believing banks can lend out the entire SLR amount. | CORRECTION: Banks must hold the SLR amount and cannot lend it out; it's a reserve.
MISTAKE: Confusing SLR as a fixed amount. | CORRECTION: SLR is a percentage of total deposits, so the actual amount changes as deposits change.
Practice Questions
Try It Yourself
QUESTION: If a bank has total deposits of Rs 50,000 and the SLR is 20%, how much money must the bank hold as liquid assets? | ANSWER: Rs 10,000
QUESTION: A bank holds Rs 9,000 as liquid assets because the SLR is 18%. What were the total deposits received by the bank? | ANSWER: Rs 50,000
QUESTION: If the SLR is 18% and a bank receives new deposits of Rs 25,000, how much more liquid assets must it hold? If it already had Rs 10,000 in liquid assets from previous deposits, what is its total liquid assets now? | ANSWER: It must hold Rs 4,500 more. Total liquid assets will be Rs 14,500.
MCQ
Quick Quiz
What kind of assets can banks hold to meet their Statutory Liquidity Ratio (SLR) requirement?
Only cash with the RBI
Cash, gold, and approved government securities
Loans given to customers
Property and buildings owned by the bank
The Correct Answer Is:
B
Option B is correct because SLR mandates banks to hold a certain percentage of deposits as cash, gold, or approved government securities. Options A, C, and D are not fully accurate or are incorrect for SLR.
Real World Connection
In the Real World
When you see news reports about the Reserve Bank of India (RBI) making announcements, they often talk about changing the SLR or other such ratios. These changes directly affect how much money banks have to give out as home loans or business loans, impacting our economy and even the interest rates on your future loans.
Key Vocabulary
Key Terms
DEPOSITS: Money customers put into a bank | LIQUID ASSETS: Assets that can be quickly converted into cash | GOVERNMENT SECURITIES: Bonds issued by the government to borrow money | RESERVE BANK OF INDIA (RBI): India's central bank that controls banking | COMMERCIAL BANKS: Banks that provide services to the public, like SBI or HDFC Bank
What's Next
What to Learn Next
Next, you should learn about the Cash Reserve Ratio (CRR). CRR is another important ratio set by the RBI that works with SLR to control the money supply and keep banks safe.
