What is Statutory Liquidity Ratio (SLR)?
SLR or statutory liquidity ratio is a crucial rule set by the Reserve Bank of India (RBI). It is a percentage of the institution’s Net Demand and Time Liabilities (NDTL) that must be set aside for investment in liquid assets such as state government or centrally approved securities. This rule ensures that banks always have enough money to meet their obligations and handle unexpected situations.
The SLR rate is the percentage set by the RBI, telling banks how much of their total deposits they must keep as this reserve. The RBI uses this rate to control how much money is available for lending, affecting interest rates and the overall economy.
Keep reading to explore SLR in detail, its importance for banks and the economy, and how changes in the SLR rate can impact lending practices, interest rates, and the stability of the financial system.
What is the Statutory Liquidity Ratio (SLR)?
Statutory Liquidity Ratio (SLR) is the percentage of a bank’s total deposits that must be kept in specific liquid assets. The Reserve Bank of India (RBI) sets the SLR. It is a regulatory requirement for all commercial banks in India.
The primary purpose of SLR is to ensure that banks maintain a minimum level of liquidity. Such maintenance will allow them to easily meet potential withdrawal demands from depositors.
Main components of SLR
According to RBI guidelines, the liquid assets for maintaining SLR can be held in the following forms:
- Cash: Banks can hold a part of their SLR requirement in cash
- Gold: Banks can invest in gold, but it must be valued at a price that does not exceed the current market price.
- Approved securities: Banks can also invest in specific securities approved by the RBI. These securities include:
- Dated government securities: These are long-term bonds issued by the Government of India under its market borrowing program or Market Stabilisation Scheme.
- Treasury bills: Short-term debt instruments issued by the Government of India.
- State Development Loans (SDLs): Bonds issued by state governments as part of their borrowing programs.
- Other instruments: The RBI may notify other eligible securities from time to time.
Calculation of SLR
SLR is expressed as a percentage of a bank’s Net Demand and Time Liabilities (NDTL). NDTL includes all deposits held by the bank, such as:
Savings deposits
Current deposits
Fixed deposits
Current SLR rate
As of April 9, 2025, the SLR is set at 18%. The RBI has set a maximum limit of 40% for the SLR. This gives the RBI enough room to make adjustments based on economic conditions.
How does the Statutory Liquidity Ratio work?
Every bank in India is required to maintain a specific percentage of its Net Demand and Time Liabilities (NDTL) in the form of cash, gold, or approved securities by the end of each day. This percentage is called the Statutory Liquidity Ratio (SLR). The Reserve Bank of India (RBI) sets this ratio and can increase it up to 40%.
When the SLR is increased, banks are required to hold more liquid assets. This reduces the funds available for lending. Such a decrease in available funds slows down the flow of money in the economy. In contrast, a lower SLR allows banks to lend more, which increases money circulation.
Please note that the RBI uses SLR as a monetary policy tool to:
Control liquidity
Maintain financial stability
Regulate the money supply
Manage inflation
Additionally, SLR ensures that banks maintain sufficient liquidity to meet depositor demands. This prevents insolvency-like conditions and maintains overall economic stability.
Why is the SLR fixed?
- To monitor the growth of bank credit.
- To ensure the financial stability of commercial banks.
- To require banks to invest in government securities like bonds.
- To stimulate growth and demand by reducing the SLR, thereby increasing liquidity for commercial banks.
If a bank fails to meet the required SLR, it must pay a penalty to the Reserve Bank of India. The penalty is 3% above the bank rate on the shortfall amount for that specific day.
SLR plays a crucial role in determining the minimum interest rate at which a bank can lend to customers, known as the base rate. This ensures transparency between the Reserve Bank of India and other public-facing banks.
The Reserve Bank of India is responsible for setting the SLR. It raises the SLR during inflation to control bank credit and lowers it during a recession to encourage bank credit.
Objectives of Statutory Liquidity Ratio
The primary objective of the SLR rate is to maintain liquidity in financial institutions operating in the country. Besides this, the SLR rate also helps:
- Control credit flow and inflation
- Promote investment in government securities
- Ensure solvency in financial institutions
- Prevent asset liquidation when the CRR is raised
- Aid the government’s debt management program
- Fuel demand and growth, for instance, when the SLR decreases and liquidity increases
Importance of Statutory Liquidity Ratio (SLR)
The Statutory Liquidity Ratio (SLR) is a crucial financial regulation for commercial banks in India, mandating them to maintain a certain percentage of their net demand and time liabilities (NDTL) in the form of liquid assets like cash, gold, or government securities. SLR serves several important purposes:
- Credit control: By adjusting the SLR, the Reserve Bank of India (RBI) can influence the amount of credit banks can extend. A higher SLR limits credit availability, while a lower SLR boosts liquidity, encouraging lending.
- Stability: It ensures that banks maintain a buffer of liquid assets, contributing to financial stability and preventing liquidity crises.
- Government financing: SLR forces banks to invest in government securities, indirectly supporting government borrowing and fiscal policies.
- Interest rate regulation: SLR also indirectly affects lending rates. By influencing the amount of money banks can lend, it impacts the overall economy’s interest rates, promoting growth or curbing inflation.
What is SLR rate?
SLR stands for statutory liquidity ratio is the percentage of minimum amount of money a bank needs to keep in safe and easily accessible forms, like cash, government securities, or gold.
The statutory liquidity ratio (SLR) is linked to the mandatory reserve of securities that financial institutions maintain as per the RBI’s instructions. The SLR rate tells institutions how much this ratio must be. It is a percentage issued by the RBI, for which the maximum is 40%.
What is the current SLR rate?
Currently, the SLR rate is 18%. The SLR rate has an important role to play in controlling how much money financial institutions can inject into the economy. An increase in the SLR rate restricts this ability, while a decrease in the SLR rate offers greater freedom. As such, paying attention to any changes made to the SLR rate can provide financial insights, especially in terms of you borrowing cost-effectively.
How is the SLR calculated?
Simply put, liquid assets that a financial institution must keep to its NDTL, demand and time liabilities into the SLR ratio formula. To calculate SLR, this is the formula to use:
SLR Formula
Formula to calculate SLR is,
SLR = (liquid assets / (demand + time liabilities)) * 100%.
SLR Example
Let’s examine ABC Bank as an example. The bank possesses Rs. 1,65,39,40,000 in liquid assets. The bank has Rs. 20,000,000,000 in NTDLs (net time and demand liabilities). Help ABC Bank’s management in calculating the statutory liquidity ratio.
Statutory liquidity Ratio = LA(Liquid Assets) / NTDL(Net Time and Demand Liabilities)
= (Rs. 1,65,39,40,000 / Rs. 20,000,000,000)*100
= 8.27%.
As a result, the bank’ SLR is 8.27%.
How is the statutory liquidity ratio calculated?
Simply put, SLR is the ratio of liquid assets that a financial institution must keep to its NDTL. To calculate SLR, this is the formula to use:
SLR = (Liquid Assets / (Time + Demand Liabilities)) * 100
What are the Components of the Statutory Liquidity Ratio?
There are 2 main components that comprise the SLR. As per Section 56 and Section 24(2A) of the Banking Act, 1949, all local area banks, UCBs, scheduled commercial banks, and state and central co-operative banks must maintain the SLR as per the rate. The 2 components are as follows:
- Liquid Assets: Liquid Assets are the assets with financial institutions that can be easily liquidated, such as gold, cash, and government bonds. In some cases, they can also consist of eligible securities that are availed through specific, RBI-approved securities. There are several approved securities that fall under this category.
- Net Demand & Time Liabilities: This is the aggregate of fixed deposit, current account and savings account balances held by a financial institution. More generally, NDTL or Net Demand & Time Liabilities is the sum of the demand liabilities, time liabilities, and other liabilities, minus the deposits held in other banks. Based on the total amount, the institution must maintain the current SLR as liquid securities.
Why does the cash reserve ratio keep on changing?
CRR serves as a safety net for customers, ensuring that banks have enough liquidity to handle a surge in demand for funds through withdrawals. Beyond that, the RBI is free to meet its other objectives and slash or increase the CRR, meaning that it can, from time to time, regulate the CRR required from banks to better control the flow of money in the economy. Since this objective is one that is subject to the dynamics of the economy, and therefore, to change, the cash reserve ratio is bound to go up or down periodically.
Difference between CRR and SLR
CRR and SLR are both components of the RBI’s monetary policy and while the CRR stands for Cash Reserve Ratio, SLR stands for Statutory Liquid Ratio. SLR is the percentage of deposits a bank needs to keep as liquid assets, while CRR is the ratio of cash reserves banks need to keep with RBI.
Basis |
SLR (Statutory Liquidity Ratio) |
CRR (Cash Reserve Ratio) |
Definition |
Percentage of NDTL banks must be maintained in liquid assets. |
Percentage of NDTL banks must be held as cash with RBI. |
Purpose |
Ensures liquidity and credit control in the economy. |
Manages cash flow and controls inflation. |
Assets maintained in |
Cash, gold, and government securities. |
Cash only. |
Held by |
Held by the bank itself. |
Maintained with the RBI. |
Impact on banks |
Reduces funds available for credit creation. |
Directly lowers funds available for lending. |
Interest earnings |
Banks earn interest on securities held under SLR. |
No interest is earned on CRR reserves. |
CRR and SLR rate - April 2025
- CRR = 4.50%
- SLR = 18%
Now that you know what is CRR and have some insight into how it impacts lending, investments, and the economy at large, proceed to make informed financial decisions.
Having a clear understanding of the SLR gives you deeper insight into the core aspects of the Indian economy. Armed with such information, you are now primed with the tools to take cost-effective, optimal, and favorable financial decisions confidently.
Assets Specified for SLR by RBI
There are several liquid assets institutions can consider to meet their statutory reserve requirements. They are as follows:
- Cash
- Gold
- Treasury bills
- Government bonds
- Dated GOI securities
- State development loans
- Dated GOI securities issued under the market borrowing scheme or market stabilisation scheme
- Other approved securities
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Impact of SLR on the home loan borrower
The Statutory Liquidity Ratio (SLR) is a requirement set by central banks that mandates financial institutions to maintain a certain percentage of their deposits in specified liquid assets like government securities. While SLR primarily impacts banks and their liquidity management, it indirectly influences home loan borrowers in the following ways:
1. Interest rates:
- SLR can influence the overall interest rate scenario in the economy. When central banks adjust SLR requirements, it may impact the cost of funds for banks. If SLR is reduced, banks might have more funds available for lending, potentially leading to lower interest rates on loans, including home loans.
2. Availability of funds:
- Changes in SLR requirements can affect the availability of funds for banks. If SLR is increased, banks may need to set aside more funds in liquid assets, potentially reducing the funds available for lending. Conversely, a decrease in SLR could free up more funds for lending.
3. Loan approval and terms:
- Banks use various factors, including liquidity conditions, to assess their lending capacity. Changes in SLR might influence a bank's willingness to approve new home loans or alter the terms and conditions, such as loan-to-value ratios and interest rates.
4. Economic conditions:
- SLR adjustments are often made by central banks in response to broader economic conditions. If SLR is increased to manage inflation or economic stability, it might have an indirect impact on interest rates and the overall economic environment, affecting borrowers, including those with home loans.
5. Market sentiment:
- Changes in SLR can signal the central bank's stance on monetary policy and impact market sentiment. This, in turn, can influence investor behaviour, interest rates, and overall economic conditions, which may have repercussions for home loan borrowers.
What happens if SLR is not maintained?
In India, SLR must be maintained by all banks, including:
Scheduled commercial banks
State cooperative banks
Central cooperative banks
Primary cooperative banks
As per RBI guidelines, they must calculate and report their Net Demand and Time Liabilities (NDTL) to the RBI every fortnight (usually on a Friday).
If a bank fails to maintain the required SLR, it will face penalties imposed by the RBI. The penalty structure is as follows:
First default |
Second default (next working day) |
If a bank does not maintain the SLR on the specified day, the RBI imposes a penalty of 3% per annum over the prevailing bank rate. |
If the bank continues to default on the next working day, the penalty increases to 5% per annum over the bank rate. |
The purpose of levying these penalties is to ensure that banks maintain adequate liquid assets to meet likely withdrawal demands from depositors. The strict penalty structure also discourages banks from taking undue risks with their liquid assets. Ultimately, SLR leads to stronger financial stability and liquidity in the banking system.
Difference between Cash Reserve Ratio and Statutory Liquidity Ratio
The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are two monetary policy tools used by the RBI. They help in:
Regulating liquidity
and
Maintaining financial stability in the banking sector
Both ratios are calculated as a percentage of bank deposits. However, they differ in terms of:
Purpose
Assets involved
Impact on banking operations
One must note that CRR primarily controls liquidity. On the other hand, SLR ensures that banks have enough liquid assets to meet obligations. By adjusting these ratios, the RBI can manage:
Money supply
Inflation
Financial stability
Below is a detailed comparison:
Aspect |
Cash Reserve Ratio (CRR) |
Statutory Liquidity Ratio (SLR) |
Definition |
The percentage of deposits that banks must keep in cash with the RBI. |
The percentage of net demand and time liabilities (NDTL) that banks must maintain in liquid assets. |
Assets involved |
Cash only. |
Cash, gold, and approved government securities. |
Purpose |
Controls liquidity in the economy by regulating the flow of cash. |
Makes sure the banks remain solvent and hold enough liquidity to meet depositor demands. |
Impact on lending |
Directly affects the funds available for lending because banks hold their cash reserves with the RBI. |
Indirectly affects lending capacity as banks must hold a portion of assets in liquid form. |
Penalty for non-compliance |
The RBI imposes a penalty for failing to maintain the required CRR. |
Penalties include higher interest charges for non-maintenance and restrictions. |
Current rate basis |
Set as a fixed percentage by the RBI. |
Set as a percentage of net demand and time liabilities (NDTL). |
Control over funds |
Funds are locked with the RBI. This reduces the bank’s lending capacity. |
Funds are invested in liquid assets. It allows for some income generation. |
Conclusion
The SLR is a regulatory tool used by the RBI to maintain financial stability in the banking system. It requires banks to hold a specified percentage of their deposits in:
Cash
Gold
Government securities
This requirement ensures that banks remain solvent and capable of meeting depositor demands. It also lets the RBI control credit flow and manage inflation.
Additionally, SLR indirectly influences a bank’s lending capacity as banks must hold a portion of their assets in liquid form. This reduces the funds available for lending. Non-compliance with SLR requirements results in financial penalties.
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SLR FAQs
The SLR regulates credit growth and inflation in the Indian economy. If SLR increases, institutions can lend less, hence there is less liquidity in the economy and there is less upward pressure on inflation. The SLR also dictates the number of liquid assets financial institutions must have on hand to meet the need of depositors, should it arise. SLR works as a monetary tool that promotes investment in government debt instruments and securities from financial institutions. As such, funding is parked in the most secure assets as the approved securities are free of risk.
Additionally, SLR also affects other parts of the economy. In some cases, you stand to gain for these changes. A good example is that SLR is one of the reference rates used to determine the base rate for loans. When the SLR decreases, lenders are likely to offer lower interest rates but if the SLR increases, it is likely that the interest rate will rise as well.
The RBI levies a 3% annual penalty over the bank rate if commercial banks do not maintain liquid assets as per the SLR. Failure to pay this penalty will result in a 5% fine the following day. The objective of imposing such a penalty is to ensure that customers have access to liquidity whenever the need arises.
The RBI's Statutory Liquidity Ratio (SLR) requires banks to set aside a portion of deposits in liquid assets, indirectly affecting home loans. Key points:
- Interest rates: SLR changes can impact home loan rates, potentially causing increases.
- Banking system liquidity: SLR influences funds for lending, affecting liquidity in the home loan market.
- Floating interest rate home loans: SLR changes may adjust monthly instalments for floating interest rate home loans.
In India, the Statutory Liquidity Ratio (SLR) is maintained by individual banks. Each bank is responsible for maintaining a certain percentage of their Net Demand and Time Liabilities (NDTL) in the form of specified liquid assets like cash, gold, government securities, etc., as mandated by the Reserve Bank of India (RBI). The RBI sets the SLR requirement as part of its monetary policy framework to ensure liquidity and stability in the banking system. Banks are required to regularly report their SLR compliance to the RBI.
The Statutory Liquidity Ratio (SLR) is important for the following reasons:
- Liquidity Management: SLR helps banks manage liquidity by requiring them to maintain a certain percentage of their NDTL (Net Demand and Time Liabilities) in liquid assets. This ensures that banks have enough funds available to meet customer demands and payment obligations.
- Financial Stability: SLR contributes to the stability of the banking system by ensuring that banks hold a portion of their liabilities in safe and easily convertible assets. This protects them during times of financial stress or liquidity shortages.
- Credit Control: SLR is a monetary policy tool used by the central bank to influence credit creation. Adjusting the SLR requirement allows the central bank to regulate the flow of credit and liquidity in the banking system. Increasing SLR limits banks' lending capacity, while decreasing it encourages lending and stimulates economic growth.
- Government Securities Market: SLR promotes the development of the government securities market. Banks are mandated to invest a significant portion of their SLR holdings in government securities, which supports government borrowing and enhances the bond market.
- Risk Mitigation: SLR helps banks mitigate risks. Holding a portion of their assets in liquid instruments reduces their exposure to credit and liquidity risks. This ensures that banks have readily sellable or pledgeable assets to fulfill their obligations during uncertain times.
In summary, SLR is vital for maintaining financial stability, regulating credit growth, and ensuring the liquidity and solvency of banks. It plays a crucial role in supporting the functioning of the financial system and contributing to overall economic stability.
The Reserve Bank of India (RBI) increases the Statutory Liquidity Ratio (SLR) to regulate the monetary policies in the country. The SLR is the percentage of deposits that banks have to maintain in the form of liquid assets, including cash, gold or approved securities, with the RBI. Here are some reasons why the RBI may increase the SLR:
- Tightening Monetary Policy: The RBI may increase the SLR as a part of its monetary policy to tighten the money supply in the economy. This helps in controlling inflation as reducing the liquidity in the system reduces the amount of money available for lending.
- Consumer Credit Demand: An increase in consumer credit demand may lead to an increase in SLR to control credit expansion, keeping a check on the loan defaults.
- Foreign Exchange Reserve Management: Countries with a current account deficit may increase the SLR to manage their foreign exchange reserves, and to reduce the country's dependence on external borrowing.
- Economic Instability: Increasing the SLR may help stabilize the banking system and improve the liquidity position of banks during economic turbulence.
- SLR-to-Deposit Ratio: The RBI may increase the SLR to maintain the SLR-to-deposit ratio set under the Banking Regulation Act, 1949.
The Statutory Liquidity Ratio (SLR) is calculated using the following formula:
SLR = (Total Liquid Assets / Net Demand and Time Liabilities) * 100
Here, "Total Liquid Assets" refers to the liquid assets held by banks, such as cash, gold, government securities, and other approved securities. These assets are readily convertible into cash without significant loss in value.
"Net Demand and Time Liabilities" (NDTL) represents the total deposits of a bank, including demand deposits (current and savings accounts) and time deposits (fixed deposits) of customers, minus the deposits held by other banks. NDTL represents the liabilities of the bank towards its customers.
The SLR is expressed as a percentage, indicating the proportion of a bank's NDTL that must be maintained in the form of liquid assets. The percentage is determined by the central bank or regulatory authority of the country and may vary over time based on monetary policy objectives and economic conditions.
It's important to note that the specific components and calculation methodology of SLR may vary across different countries and regulatory frameworks. The formula provided here represents a general formula commonly used for SLR calculation.
In India, the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) rates are set by the Reserve Bank of India (RBI). The RBI is the central banking institution in India and has the authority to regulate monetary policy and banking operations in the country.
The RBI determines the CRR and SLR rates based on various factors such as economic conditions, inflationary pressures, liquidity requirements in the banking system, credit growth, and financial stability considerations. These rates are used as monetary policy tools to manage liquidity, credit creation, and overall financial stability in the economy.
The RBI periodically reviews and adjusts the CRR and SLR rates to align with its monetary policy objectives and to address changing economic conditions. The rates set by the RBI have a direct impact on the liquidity position of banks and the availability of credit in the economy.
The Statutory Liquidity Ratio (SLR) is decided by the Reserve Bank of India (RBI). It sets the minimum percentage of a bank's net demand and time liabilities (NDTL) that must be maintained in the form of liquid assets, such as cash, gold, or government securities.
SLR directly impacts liquidity in the banking system. A higher SLR restricts the amount of funds banks can lend, reducing credit availability. Conversely, a lower SLR increases liquidity, allowing banks to lend more, thereby boosting credit flow in the market.
SLR requires banks to hold a portion of their liabilities in liquid assets like government securities, while the Cash Reserve Ratio (CRR) mandates banks to keep a portion of deposits as cash reserves with the RBI. CRR impacts liquidity directly, while SLR regulates it indirectly.
A high SLR reduces the funds available for lending, potentially leading to higher interest rates as banks try to balance their reserves. Conversely, a lower SLR increases lending capacity, which can drive down lending rates, making credit more affordable for borrowers.
