Statutory Liquidity Ratio (SLR)

The statutory liquidity ratio mandates the minimal portion of deposits that commercial banks must hold in liquid cash and securities. Read more to understand in detail.
Statutory Liquidity Ratio (SLR)
3 mins read
30 March 2024

The Reserve Bank of India (RBI) has several measures in place to tread the fine line between curbing inflation and promoting growth. One such measure is the SLR, the full form of which is the statutory liquidity ratio. Let us take a closer look at what the SLR is, how it is used, and why it is important.

What is the Statutory Liquidity Ratio (SLR)

The statutory liquidity ratio is the minimum percentage of deposits that commercial banks must maintain before they extend credit facilities to their customers. These deposits can be held in different ways — in the form of liquid cash, gold, government and other approved securities, or other instruments.

The SLR is calculated as the ratio of a bank’s liquid assets to its Net Demand and Time Liabilities (NDTL). In our country, the responsibility of deciding the statutory liquidity ratio lies with the Reserve Bank of India (RBI). While the current SLR is 18%, the RBI is authorised to increase or decrease the ratio as it deems fit. The SLR can be increased up to a maximum limit of 40% but has no minimum limit.

Objectives of the SLR

Based on the meaning of the statutory liquidity ratio, it becomes evident that the SLR fulfils various purposes. Its key objectives include the following:

  • To prevent over-liquidation
    The Cash Reserve Ratio (CRR) is the minimum amount of cash deposits banks must have with the RBI. When the RBI raises the CRR, banks may attempt to sell some of their liquid assets to generate the cash needed for such deposits. To prevent this kind of over-liquidation and ensure that banks remain solvent, the RBI has also established a statutory liquidity ratio.
  • To regulate the flow of bank credit
    By increasing or decreasing the statutory liquidity ratio, the central bank can regulate the flow of credit from commercial banks to their customers. An increase in the SLR limits the flow of credit during periods of inflation. Conversely, a decrease in the SLR accelerates the flow of credit when the economy shows signs of recession. This helps curb both inflationary and recessionary pressures as required.

Different uses and benefits of the statutory liquidity ratio (SLR)

As a monetary policy tool, the statutory liquidity ratio has several uses. The Reserve Bank of India may increase or decrease the SLR depending on the economic phase or cycle. Here is how this benefits the banks, their customers, and the economy at large.

  • It ensures the solvency of commercial banks in the country.
  • It promotes investments in government securities, gold, and other approved instruments.
  • When increased, it curbs inflation by limiting the amount of credit available to users and the cash flow in the economy.
  • When reduced, it increases the cash flow in the economy and promotes growth.

The two key components of the statutory liquidity ratio

As is evident from the meaning of the statutory liquidity ratio, it is calculated using two metrics: liquid assets and the Net Demand and Time Liabilities (NDTL). Here’s what they each entail.

  • Liquid assets
    These are the assets that can easily be converted into cash. Some common examples of such assets include treasury bills, government bonds, other government securities, gold, and money market instruments.
  • Net Demand and Time Liabilities (NDTL)
    This is the net amount that a commercial bank owes its customers and other financial institutions. They include demand liabilities (i.e. deposits that are payable on demand) and time liabilities (i.e. deposits that are payable after a specific period, otherwise than on demand).

Demand liabilities include savings bank deposits, overdue FDs, margins against LoC, etc. Time liabilities include fixed deposits, recurring deposits, certificates of deposit, etc.

How does the SLR differ from the CRR

The cash reserve ratio or CRR is another monetary policy tool that ensures liquidity and solvency among commercial banks. It is often confused with the SLR, but the two ratios are different in many ways. Here is an overview of the key differences between the SLR and the CRR.

Particulars

Statutory Liquidity Ratio (SLR)

Cash Reserve Ratio (CRR)

Meaning

The minimum percentage of deposits that commercial banks should maintain

The percentage of cash reserves that commercial banks must hold with the RBI

Purpose

To regulate the supply of credit in the economy during inflation and recession

To promote liquidity among commercial banks in the country

Assets in which funds are held

Cash, gold, government bonds and other approved securities

Cash only

The entity with which the assets are held

Eligible assets held with the commercial banks

Cash reserve maintained with the RBI

Interest earnings

Banks earn interest or returns on the funds held to meet the SLR requirements

Banks do not earn interest on the cash reserves

 

Conclusion

Having a statutory liquidity ratio in place helps commercial banks maintain adequate liquidity. It also offers broader economic benefits by promoting growth or curtailing inflation as needed. To avoid the annual penalty levied in case of default, banks must adhere to the SLR set by the RBI.

Frequently asked questions

What is the SLR?

The SLR, or the statutory liquidity ratio, refers to the minimum percentage of deposits that commercial banks must maintain before they offer credit to customers. These deposits can be held as cash, gold, approved securities, and other instruments.

What is the statutory liquidity ratio in India currently?

The current statutory liquidity ratio in India is 18%.

How to calculate the SLR?

To calculate the statutory liquidity ratio, divide a bank’s liquid assets by net demand and time liabilities. The SLR is expressed as a percentage of this result.

Who decides the SLR?

The Reserve Bank of India (RBI) decides the statutory liquidity ratio that all the commercial banks in the country must adhere to.

What is the purpose of the statutory liquidity ratio?

The statutory liquidity ratio is a means to promote growth and regulate inflation in the economy. Increasing the SLR helps curb inflation while decreasing the ratio fuels growth.

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