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Statutory Liquidity Ratio: Meaning, Formula & Examples

Nupur Wankhede

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.

What Is Statutory Liquidity Ratio (SLR)

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.

In simple terms:

  • 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.

Statutory Liquidity Ratio in India

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.

Key highlights of SLR regulation in India:

  • 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.

Formula & Calculation of SLR

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

Steps to calculate SLR:

  1. Determine the bank’s total NDTL

  2. Identify eligible liquid assets

  3. Apply the formula to get the ratio

The resulting percentage must match or exceed the minimum SLR prescribed by RBI.

Objectives & Uses of SLR

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

Advantages of Statutory Liquidity Ratio

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.

SLR vs CRR: Key Differences

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.

Impacts of Changes in SLR

When RBI changes the SLR requirement, it directly affects the banking system and economy.

If SLR increases:

  • Banks have fewer funds available for lending

  • Credit growth slows down

  • Borrowing becomes more expensive

  • Liquidity tightens

If SLR decreases:

  • 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.

Disadvantages of Statutory Liquidity Ratio

Despite its benefits, SLR also has some limitations.

Key drawbacks:

  • 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.

Case Study / Scenario

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.

Conclusion & Key Takeaways

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.

Disclaimer

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.

FAQs

What is the formula for SLR?

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.

What happens if a bank fails to maintain SLR?

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.

How is SLR different from CRR?

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.

Who decides the SLR rate?

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.

Hi! I’m Nupur Wankhede
BSE Insitute Alumni

With a Postgraduate degree in Global Financial Markets from the Bombay Stock Exchange Institute, Nupur has over 8 years of experience in the financial markets, specializing in investments, stock market operations, and project management. She has contributed to process improvements, cross-functional initiatives & content development across investment products. She bridges investment strategy with execution, blending content insight, operational efficiency, and collaborative execution to deliver impactful outcomes.

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