Statutory Liquidity Ratio

The Statutory Liquidity Ratio (SLR) is a key monetary policy instrument used by the Reserve Bank of India (RBI) to regulate credit growth, maintain financial stability, and ensure liquidity in the banking system. It refers to 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 approved government securities before providing credit to customers.
The SLR is mandated under the Banking Regulation Act, 1949, and serves as a mechanism to ensure that banks always have sufficient liquidity to meet withdrawal demands and to promote the stability of the financial system.

Definition

According to Section 24(2) of the Banking Regulation Act, 1949, the Statutory Liquidity Ratio (SLR) is defined as:

“The percentage of a bank’s total demand and time liabilities that must be maintained in the form of liquid assets such as cash, gold, or approved securities.”

In simpler terms, it is the proportion of a bank’s total deposits that it must compulsorily invest in safe and liquid assets as prescribed by the RBI.

Components of SLR

Banks can maintain their SLR requirements in the form of:

1. Cash (not including cash reserve maintained under CRR).
2. Gold (valued at current market prices).
3. Approved Securities, primarily Government of India or State Government bonds and Treasury Bills (T-Bills).

These assets are considered safe and easily convertible into cash, thus ensuring that the banking sector maintains adequate liquidity.

Objective of SLR

The Statutory Liquidity Ratio serves multiple economic and regulatory purposes:

1. Ensure Liquidity: To make sure banks have sufficient liquid funds to meet depositor demands.
2. Promote Financial Stability: By requiring banks to invest in secure assets, the SLR reduces risk and safeguards the financial system.
3. Control Credit Expansion: By adjusting the SLR, the RBI can influence the amount of funds available for lending, thus managing inflation or stimulating growth.
4. Support Government Borrowing: A portion of bank funds invested in government securities helps the government raise funds for developmental and fiscal purposes.
5. Maintain Public Confidence: It assures depositors that banks are maintaining a healthy reserve of safe assets.

Calculation of SLR

The SLR is calculated as a percentage of Net Demand and Time Liabilities (NDTL) of a bank.
SLR (%)=(Liquid AssetsNDTL)×100\textbf{SLR (\%)} = \left( \frac{\text{Liquid Assets}}{\text{NDTL}} \right) \times 100SLR (%)=(NDTLLiquid Assets​)×100
Where:

• Liquid Assets include cash, gold, and approved securities.
• NDTL (Net Demand and Time Liabilities) includes:
  • Demand Liabilities (deposits payable on demand, e.g., savings and current account deposits).
  • Time Liabilities (deposits repayable after a fixed period, e.g., fixed deposits, recurring deposits).

Example: If a bank’s NDTL is ₹1,000 crore and the SLR prescribed by the RBI is 18%, the bank must maintain ₹180 crore (18% of ₹1,000 crore) in liquid assets.

Current SLR in India

As of recent RBI guidelines, the SLR stands at 18.00% of NDTL. This figure is periodically reviewed by the Reserve Bank of India based on prevailing economic conditions, monetary policy objectives, and liquidity requirements in the financial system.
Historically, the SLR has been as high as 38.5% in the early 1990s, but has been gradually reduced to encourage lending and stimulate economic growth.

Difference Between SLR and CRR

Both SLR and CRR are essential monetary tools used by the RBI to maintain liquidity balance and monetary discipline in the economy.

Role of SLR in Monetary Policy

The SLR is an important component of the Reserve Bank of India’s monetary policy framework, helping to regulate credit growth and liquidity:

1. Anti-inflationary Tool: When inflation rises, the RBI may increase the SLR to curb excessive lending and reduce money supply.
2. Pro-growth Tool: During periods of slowdown, the RBI may lower the SLR to free up more funds for lending and investment.
3. Banking Discipline: It compels banks to maintain a minimum level of liquid assets, ensuring prudent management of depositor funds.
4. Indirect Fiscal Support: It indirectly helps the government raise funds through the sale of government securities to banks.

Implications of SLR

Positive Implications:

• Promotes financial discipline among banks.
• Ensures liquidity and protects depositor interests.
• Helps stabilise the money market and control credit expansion.

Negative Implications:

• A high SLR reduces the amount of funds available for lending, which can slow economic growth.
• Lower profitability for banks since funds are locked in low-yielding government securities.

SLR and the Indian Financial System

The SLR plays a critical role in India’s banking and economic stability. By mandating a minimum level of liquidity, the RBI ensures that:

• Banks remain solvent even in periods of financial stress.
• Depositors have confidence in the banking system.
• The government can raise funds efficiently through secure channels.

The reduction of SLR over the years reflects India’s transition towards a more liberalised and market-oriented economy, encouraging banks to diversify investments and increase credit flow to productive sectors.

Historical Evolution of SLR in India

Example of Monetary Effect

If the RBI increases SLR, banks are required to hold more liquid assets, leaving less money for loans and credit creation. This helps control inflation.If the RBI reduces SLR, banks can lend more, thereby stimulating economic activity and investment.