Statutory Liquidity Ratio: SLR_banner_WC


Statutory Liquidity Ratio_WC

Understanding SLR

Statutory Liquidity Ratio (SLR) refers to the minimum percentage of deposits that commercial banks are mandated to maintain as gold assets, cash, or government-approved securities, in their own vaults. These deposits have to be maintained by the banks themselves and not with the Reserve Bank of India.

By definition, the SLR is the ratio of a bank’s liquid assets to their Net Demand and Time Liabilities (NDTL). The SLR is an essential instrument in the RBI’s monetary policy that helps regulate the cash flow in the economy and ensures the bank’s stability.

The current SLR, as of 24 May 2022, is 18%, however, the RBI has the authority to raise it to 40%. The higher the SLR on commercial banks, the higher restrictions placed on their liquidity and ability to inject funds into the economy. If a bank fails to meet the SLR requisite, they are charged a penalty by the apex body.

The following lending institutions are liable to maintain an SLR, per the Banking Regulation Act 1949:

  • Scheduled Commercial Banks
  • Local Area Banks
  • Primary (Urban) Co-operative Banks
  • State Co-operative Banks
  • Central Co-operative Banks

Just like the SLR, the CRR (Cash Reserve Ratio) is also a tool in the RBI’s monetary policy that serves to stabilise the cash flow in the economy. However, the instruments function in different forms to ensure the same outcome. Here is a comparison between the both:

Statutory Liquidity Ratio (SLR) Cash Reserve Ratio (CRR)
Ensures that commercial banks maintain a variety of reserves in the form of gold, cash, and securities with themselves Ensures that commercial banks maintain a cash reserve with the Reserve Bank of India
Used to control the bank’s leverage for credit expansion A way for the regulatory body to control the volume of liquidity in the Indian Banking system
Can earn a portion of interest on the assets and cash parked as reserve Can earn no interest on the cash reserve parked with the RBI

The Reserve Bank of India controls two aspects through the SLR that have a considerable impact on the economy.

  1. To Regulate the Flow of Credit: The SLR can control inflation to a large extent by regulating the bank’s liquidity at any given time.

  2. To Avoid Over-liquidating: The SLR also ensures that banks can sustain themselves and not over-liquidate their assets at the time of need - ensuring that solvency does not become an issue. 

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