Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Statutory Liquidity Ratio”
Statutory Liquidity Ratio is the amount of liquid assets such as precious metals or other approved securities, which a financial institution must maintain as reserves other than the cash.
SLR is used to limit the expansion of bank credit, for ensuring the solvency of banks even if all the loans by the bank go bad, the bank can still retrieve a part of it by selling the gold or govt securities.
The main objectives for maintaining the SLR ratio are the following:
To control the expansion of bank credit.
To ensure the solvency of commercial banks.
To compel the commercial banks to invest in government securities like government bonds.
If any bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes liable to pay penalty. The central bank can increase the SLR to control inflation, suck liquidity in the market, to tighten the measure to safeguard the customer’s money. In a growing economy banks would like to invest in stock market, not in government securities or gold as the latter would yield less returns. One more reason is long term government securities or any bond) are sensitive to interest rate changes. But in an emerging economy interest rate change is a common activity.

By Barry Norman, Investors Trading Academy

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