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Understand the statutory liquidity ratio to discover how banks maintain mandatory liquid assets to support financial stability.
The Statutory Liquidity Ratio (SLR) is an essential requirement in the Indian banking system. It ensures that banks keep enough liquid assets on hand to meet depositors’ needs and protect overall financial stability. This regulatory requirement plays an important role in maintaining liquidity, controlling credit growth, and strengthening trust in the banking sector.
The Statutory Liquidity Ratio refers to the percentage of a bank’s Net Demand and Time Liabilities (NDTL) that must be held in the form of liquid assets. These assets include cash, gold, and approved government securities.
SLR is a safety cushion for depositors.
It ensures banks remain liquid enough to meet withdrawal demands.
It acts as a monetary policy tool for the Reserve Bank of India (RBI).
A higher SLR means banks have less room to lend, while a lower SLR gives them more flexibility.
In India, the SLR requirement is set and monitored by the Reserve Bank of India. The ratio changes from time to time based on economic conditions, inflation levels, and liquidity needs.
Mandated under the Banking Regulation Act, 1949
Applies to all scheduled commercial banks
Helps RBI regulate inflation and credit expansion
Influences interest rates and loan availability
Banks must report their SLR holdings to RBI regularly, and non-compliance attracts penalties.
SLR is calculated using the following formula:
SLR = (Liquid Assets ÷ Net Demand and Time Liabilities) × 100
Where:
Liquid Assets include cash, gold, and approved government securities
NDTL refers to total deposits plus other liabilities on which interest is payable
Determine the bank’s total NDTL
Identify eligible liquid assets
Apply the formula to get the ratio
The resulting percentage must match or exceed the minimum SLR prescribed by RBI.
SLR serves several important purposes in India’s financial system.
Key objectives:
Maintain liquidity in the banking system
Ensure long-term financial stability
Provide safety to depositors
Help RBI regulate credit flow in the economy
Control inflation by influencing loanable funds
Practical uses:
Helps banks manage liquidity risk
Supports government borrowing through investments in securities
Acts as a buffer during economic stress
SLR offers multiple benefits for depositors, banks, and the overall economy.
Major advantages:
Promotes financial discipline among banks
Ensures availability of liquid assets at all times
Strengthens confidence in the banking system
Helps control inflation and credit creation
Provides a stable demand for government securities
These characteristics make SLR an integral part of India’s monetary framework.
Both SLR and CRR (Cash Reserve Ratio) are liquidity-related requirements, but they serve different purposes.
| Feature | SLR | CRR |
|---|---|---|
Assets Held |
Cash, gold, government securities |
Cash only |
Earnings |
SLR securities earn interest |
CRR funds earn no interest |
Purpose |
Maintain liquidity and regulate credit |
Maintain cash reserves with RBI |
Custody |
Held by banks |
Maintained with RBI |
SLR gives banks more flexibility compared to CRR because it allows interest-earning assets.
When RBI changes the SLR requirement, it directly affects the banking system and economy.
Banks have fewer funds available for lending
Credit growth slows down
Borrowing becomes more expensive
Liquidity tightens
Banks can lend more
Credit availability increases
Helps stimulate economic activity
Enhances liquidity in the system
These shifts help RBI manage inflation and financial stability.
Despite its benefits, SLR also has some limitations.
Reduces banks’ lending capacity
May lead to lower profitability
Frequent changes create uncertainty
Can limit credit flow for businesses
Banks must balance SLR requirements with their operational and profitability goals.
Imagine a bank with rising demand for home loans. If the RBI decides to increase the SLR due to inflation concerns, the bank must hold more liquid assets. This reduces the amount it can lend. As a result, the bank may increase interest rates or restrict new loans.
This scenario shows how SLR adjustments influence lending behaviour, loan pricing, and overall credit supply.
Overall, the Statutory Liquidity Ratio plays a central role in shaping the financial environment in India.
Key Highlights:
SLR is an important regulatory requirement that ensures liquidity and stability in the banking system.
It includes cash, gold, and government securities held as a percentage of NDTL.
A higher SLR tightens liquidity, while a lower SLR promotes lending.
SLR helps RBI control inflation, credit growth, and financial stability.
Despite reducing lending capacity, it remains an important safeguard for depositors and the economy.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Statutory Liquidity Ratio, or SLR, is calculated using the formula: SLR = (Liquid Assets ÷ Net Demand and Time Liabilities) × 100. The formula shows the proportion of a bank’s liabilities that must be maintained in the form of liquid assets.
If a bank does not maintain the required SLR, the Reserve Bank of India may apply penalties and direct the bank to restore the shortfall immediately. The non-compliance must be corrected to ensure adherence to regulatory liquidity standards.
SLR differs from CRR because SLR includes liquid assets such as approved securities and cash held by the bank, whereas CRR consists only of cash balances maintained with the Reserve Bank of India. Assets held under SLR may earn interest, while CRR balances do not.
The Statutory Liquidity Ratio is set and periodically revised by the Reserve Bank of India. Adjustments to the SLR requirement are made in line with the broader economic environment and liquidity considerations.
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