Question

How does the central bank use the SLR to exercise credit control in a country?

Answer 1

SLR is a quantitative approach to credit control. Commercial banks are required by law to hold a specified amount of their demand and time obligations in liquid form, such as cash and government securities.

1. To reduce credit: When the central bank wants to reduce the amount of credit, it raises the SLR. As a result, commercial banks must hold a bigger share of their funds in liquid assets, resulting in less money available to lend. Their credit-granting capacity is reduced, hence controlling inflation.
2. To expand credit: When the central bank wants to extend credit, it reduces the SLR. Banks can therefore maintain a lesser portion in liquid form, freeing up more funds for lending, thereby increasing credit and economic activity.