SLR stands for Statutory Liquidity Ratio and 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 (RBI).
The SLR is the ratio of a bank’s liquid assets to its Net Demand and Time Liabilities (NDTL). It 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 rate, as of February 08, 2024, is 18%, however, the RBI has the authority to raise it to 40%. The higher the SLR on commercial banks, the higher the restrictions placed on their liquidity and ability to inject funds into the economy. If a bank fails to meet the Statutory Liquidity Ratio 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
As stated earlier, the Statutory Liquidity Ratio Rate is the percentage of deposits that banks are required to maintain in the form of liquid assets such as cash, gold, and government securities. SLR is a monetary policy tool used by the RBI to regulate the fund supply in the economy.
The formula to calculate the SLR rate is as follows:
SLR = (Liquid assets held by the bank) / (Net demand and time liabilities (NDTL)) x 100
To calculate Statutory Liquidity Ratio (SLR), the bank first needs to determine the liquid assets it holds, such as cash, gold, and government securities. The total of these liquid assets is then divided by the NDTL of the bank, which is the sum of demand and time deposits held by the bank. The result is then multiplied by 100 to convert it into a percentage.
For example, if a bank has liquid assets worth Rs.5,000 Crore and NDTL of Rs.10,000 Crore, then the SLR can be calculated as:
SLR = (5,000 / 10,000) x 100 = 50%
This means that the bank is required to maintain a minimum SLR of 50% on its deposits. If the bank fails to maintain the required SLR, it may be penalised by the RBI.
Liquid Assets:
Liquid assets held by the bank: This includes cash, gold, and government securities held by the bank.
Net Demand and Time Liabilities (NDTL):
Net demand and time liabilities (NDTL): This includes the sum of demand and time deposits held by the bank. Demand deposits are those that can be withdrawn anytime, whereas time deposits have a fixed maturity date.
SLR Limit:
The SLR limit refers to the minimum percentage of deposits that banks in India are required to maintain in the form of liquid assets such as cash, gold, and government securities. The SLR limit is set by the Reserve Bank of India, which is the central bank of India, and is used as a tool for monetary policy.
As of February 2022, the SLR limit in India is set at 18%. This means that banks are required to maintain a minimum of 18% of their NDTL in the form of liquid assets. However, the RBI has the authority to change the SLR limit as needed, based on the prevailing economic conditions.
The Statutory Liquidity Ratio is a regulatory tool used by the Reserve Bank of India to regulate liquidity in the banking system. The objectives of SLR are as follows:
To Ensure the Solvency of Banks
By mandating banks to maintain a minimum percentage of their Net Demand and Time Liabilities in the form of liquid assets, the RBI ensures that banks have sufficient assets to cover their liabilities. This helps to maintain the solvency of banks and protect the interests of depositors.
To Control Credit Expansion
The SLR requirement acts as a curb on the credit expansion of banks. Banks are required to maintain a certain percentage of their deposits in liquid assets, which reduces the amount of funds available for lending. This helps to prevent excessive credit expansion, which can lead to inflation and economic instability.
To Promote Investment in Government Securities
The SLR requirement encourages banks to invest in government securities, which are considered safe and highly liquid. This helps to finance government projects and initiatives, which can contribute to economic development.
To Provide Stability to the Financial System
The SLR requirement is designed to provide stability to the financial system. By mandating banks to maintain a certain percentage of their deposits in liquid assets, the RBI ensures that banks have the resources to withstand financial shocks and disruptions.
Overall, the SLR is an important regulatory tool used by the RBI to maintain the stability of the banking system and control the supply of funds in the economy.
Just like the Statutory Liquidity Ratio, 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 CRR and SLR:
| 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.
- 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.
- 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.
*Terms and conditions apply.
Statutory Liquidity Ratio FAQs
The Reserve Bank of India (RBI) is responsible for deciding the SLR to be maintained by other banks.
The Reserve Bank of India (RBI) has made it mandatory for all commercial banks to maintain a Statutory Liquidity Ratio (SLR). The primary objective of the SLR is to maintain liquidity in financial institutions, and apart from this, there are other important factors as well:
- It helps in controlling inflation in the economy
- Promoting investments in government securities
- Helping the government's debt management program
- This increases the demand when the SLR decreases, thus increasing the liquidity
- Prevents asset liquidation with the CRR increase
As per the latest update on February 08, 2024, the current SLR rate is 18%. Tracking all rate announcements made by the RBI to the SLR rate is important, as it provides financial insight into the ongoing market trends and economic borrowing.
If a bank fails to maintain its SLR, the RBI imposes a 3% annual penalty on the current bank rate. With a delay of each day, there is an increase in the penalty, going to 5%. This practice ensures that the banks comply with the mandate and have cash available when the customer requires it.
The Statutory Liquidity Ratio (SLR) is important for the stability of the banking system and the economy. It ensures that banks have sufficient liquid assets to cover their liabilities, controls credit expansion, promotes investment in government securities, and provides stability to the financial system. The SLR is an effective tool for the Reserve Bank of India to regulate the liquidity in the banking system and prevent economic instability.
The Statutory Liquidity Ratio (SLR) mandates that banks in India maintain a certain percentage of their Net Demand and Time Liabilities (NDTL) in the form of liquid assets such as cash, gold, and government securities. This ensures that banks have sufficient liquid assets to cover their liabilities and can promote stability in the financial system. The SLR is a tool used by the Reserve Bank of India to regulate the liquidity in the banking system and control the fund supply in the economy.
SLR = (Liquid assets held by the bank) / (Net Demand and Time Liabilities)
Where:
Liquid assets include cash, gold, and government securities held by the bank. Net Demand and Time Liabilities (NDTL) refer to the total amount of deposits and other liabilities of a bank that are payable on demand or after a certain period of time.
If the Statutory Liquidity Ratio (SLR) increases, banks are required to maintain a higher percentage of their Net Demand and Time Liabilities (NDTL) in the form of liquid assets such as cash, gold, and government securities. This means that banks will have less funds available for lending and investing, which can lead to a decrease in the supply of credit in the economy. As a result, borrowing costs for consumers and businesses may increase, which can lead to a decrease in spending and investment.
No, Non-Banking Financial Companies (NBFCs) in India are not required to maintain the Statutory Liquidity Ratio (SLR) as they are not commercial banks. The SLR is a regulatory requirement imposed by the Reserve Bank of India (RBI) on commercial banks in the country. However, NBFCs are subject to other prudential norms such as the Capital Adequacy Ratio (CAR) and the Cash Reserve Ratio (CRR), which are designed to ensure their financial stability and protect the interests of their customers.
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