How does the Central Bank control credit through SLR?

Statutory Liquidity Ratio (SLR) — Commercial banks are required to keep a certain percentage of their demand and time liabilities in liquid form, consisting of cash and government securities. This is known as the SLR.

How it controls credit:

1. To reduce credit — When the central bank wants to reduce the volume of credit in the economy, it raises the SLR. As a result, commercial banks have to keep more of their funds locked up in liquid assets like cash and government securities, which reduces their capacity to grant credit to borrowers.

2. To expand credit — Conversely, when the central bank wants to expand credit, it lowers the SLR. Commercial banks then have more funds available for lending, which increases their credit-granting capacity.