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What is Statutory Liquidity Ratio (SLR) & How to Calculate?

what is statutory liquidity ratio and its calculation

The Full form of "SLR is Statutory Liquidity Ratio." SLR is a minimum percentage of deposits that commercial banks must keep as liquid assets. The Reserve Bank of India can set and change the SLR when necessary.

The Reserve Bank of India maintains various instruments within its monetary policy to administer the Indian economy. It influences commodity prices, cash flow or money supply regulation, and many other economic factors.

The statutory liquidity ratio (SLR) is one financial instrument used by the RBI to maintain banks' solvency.

Read on to learn more about SLR!

What is the Statutory Liquidity Ratio?

The meaning of statutory liquidity ratio is a mandatory reserve requirement that Indian commercial banks must maintain through liquid assets like cash, gold, bonds, PSU, and RBI-approved securities.

The RBI Act mandates that commercial banks maintain a percentage of their net demand and time liabilities (NDTL) as SLR. RBI determines this percentage of SLR to control a bank's expansion.

A change in this ratio controls financial institutions' ability to inject money into our economy. Therefore, the RBI increases it during inflation to restrict banks and NBFCs from providing loans.

Objectives of Statutory Liquidity Ratio (SLR)

RBI fulfills the following objectives through the statutory liquidity ratio in India:

SLR controls the bank to oversupply liquid money in the public's hands.
It controls the money supply and currency flow in our economy.
It becomes a crucial instrument to tackle both inflation and deflation.
It ensures the solvency of all financial institutions by improving their monetary supply.
SLR assists the government's debt management strategies.
It encourages investments in government securities.

Uses of Statutory Liquidity Ratio (SLR)

The Statutory Liquidity Ratio (SLR) is a monetary policy tool used by the Reserve Bank of India (RBI) to regulate the banking system and the economy. It has many uses, including:

1. Ensuring Bank Solvency

SLR ensures banks have enough liquid assets to cover their liabilities.

2. Controlling Credit Expansion

SLR helps control the amount of credit available to users, which can help curb inflation.

3. Promoting Investment In Government Securities

SLR encourages banks to invest a portion of their deposits in government securities, which helps ensure their solvency.

4. Managing Government Debt

SLR helps the government sell securities with protection and manage its debt.

5. Risk Management

SLR helps banks mitigate the risk of default during financial crises or liquidity shortages.

6. Meeting Seasonal Credit Requirements

SLR helps banks meet their seasonal credit requirements.

7. Keeping Prices Stable

SLR helps stabilize prices, contributing to good economic development.

Components of Statutory Liquidity Ratio (SLR)

Statutory Liquidity Ratio comprises two components as follows:

1. Liquid Assets

Liquid assets are readily convertible into cash. Gold, cash reserves, government bonds, treasury bills, and RBI-approved securities fall under this category. These include eligible securities under Market Stabilisation Schemes and Market Borrowing Programmes.

2. Net Demand and Time Liabilities (NDTL)

A bank holds this aggregate balance of demand and public time deposits. Demand deposits are liabilities a bank must pay on demand, comprising current and savings accounts, demand drafts, etc. In contrast, time liabilities such as fixed deposits do not allow you to withdraw deposits immediately. These have a maturity period before which you cannot access the deposit.

How to Calculate Statutory Liquidity Ratio (SLR) with Example?

To calculate the Statutory Liquidity Ratio (SLR), you need to determine the bank's Net Demand and Time Liabilities (NDTL) and apply the required SLR percentage set by the central bank (e.g., the Reserve Bank of India). Here's how to calculate it:

SLR Formula:

SLR=Liquid Assets/Net Demand and Time Liabilities (NDTL)×100

SLR Calculation With an Example:

Suppose a bank has:

NDTL = ₹500 Crores
Liquid Assets = ₹150 Crores
If the required SLR is 18% (as per RBI's requirement), the calculation would be:

SLR = 150/500×100 = 30%

This means the bank maintains 30% of its NDTL in liquid assets, above the required 18% SLR.

What is the Current SLR Rate?

The Statutory Liquidity Ratio (SLR) applicable in India is 18% as of January 29, 2024. This means that commercial banks are required to maintain liquid assets amounting to a minimum of ₹ 18 for every ₹100 deposits held by the bank. This SLR ensures the safety of the banks and lowers the general risk rate.

The Reserve Bank Of India (RBI) determines and regulates SLR, where the SLR ratio can range between 23 and 40%. He can raise the SLR to 40%. All Indian banks must furnish their SLR position to the RBI every 7th day of the week. Any bank that fails to satisfy one SLR requirement is said to suffer a loss or danger from RBI.

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Types of Institutions That Need to Maintain an SLR

The following are the institutions for which RBI must maintain a statutory liquidity ratio.

Scheduled Commercial Banks.
Non-scheduled Commercial Banks.
Co-operative Banks (both state and central).
Urban Co-operative Banks (UCB)
Small Finance Banks, Payments banks, and Local Area Banks

Impact of Statutory Liquidity Ratio on Investors & Base Rate

The Statutory Liquidity Ratio (SLR) plays a vital role in shaping the economic landscape, influencing various financial entities, including investors and the base rate set by banks. Here's how SLR impacts these areas:

Impact of SLR on Investors

The SLR requires that commercial banks invest a percentage of their net demand and time liabilities in liquid assets such as government securities. This directly impacts investors:

Investment in Government Securities: Given that SLR mandates holding government bonds in the banks' books, this may be a sure demand for the securities, thus benefiting the investors.
Reduced Investment Flexibility for Banks: The reserve requirement limits banks' flexibility to lend or invest in other high-yield assets. This may affect the overall returns the banks offer and impact the returns to the investors.
Potential for Lower Returns on Bank Deposits: To comply with SLR, banks invest a portion of their funds in low-yield government securities, which may reduce depositors' returns on deposits and, therefore, affect investment choice.
Market Liquidity and Yield Curve: If SLR increases, forcing banks to hold government securities may significantly negatively influence the yield curve and market liquidity. Long-term investors in government bonds would benefit from a stable SLR.

Impact of SLR on Base Rate

The base rate is the rate a commercial bank lends to its customers. The following are the effects of the SLR on the base rate:

Cost of Funds to Banks: Banks must hold a higher portion of their assets in liquid cash forms, such as government bonds, which yield less income than other forms of investment.
Credit Supply and Interest Rate: A high SLR limits the bank's lending capacity, hence the supply of credit available in the economy. Therefore, the banks' base rates may increase to check the loan demand and keep their profitability intact.
Link with Inflation Control: Central banks manipulate SLR to control inflation. It is generally true that a higher SLR brings with it a higher base rate, and holding up operational costs, banks pass on this cost to consumers.

Reasons for Reduction in Statutory Liquidity Ratio by RBI

The Reserve Bank of India (RBI) occasionally reduces the Statutory Liquidity Ratio (SLR) to stimulate economic growth and ensure better liquidity in the banking system. Here are several key reasons for reductions:

1. Boosting Credit Flow

The reduction in SLR allows banks to hold fewer reserves in liquid assets, thereby allowing them to lend more to businesses and individuals. This would, therefore, support economic growth, especially during an economic slowdown or low demand.

2. Improving Liquidity in the Market

Low SLR increases cash availability in the banking system by supporting the immediate need for short-term liquidity. This boosts economic performance mainly during periods of stagnant inflation and low demand since cash ensures the economy has enough in circulation.

3. Encouraging Investment

Lower SLR requirements make banks invest in more productive assets, such as loans given to industries and businesses, rather than tying up the funds in low-yield government securities. This helps increase economic growth by channeling resources into sectors with high returns.

4. Controlling Inflation

In case inflation is controlled, reducing SLR will help banks better manage their liquidity without letting it go into excess money supply, which otherwise may force inflationary pressures. More room for lending may be given by the RBI while keeping price stability.

5. Supporting Growth in Government Borrowing

Lower SLR requirements can boost demand for other investment forms, which could help the government's borrowing needs if funds shift to other areas. This helps the government meet its borrowing requirements efficiently and supports fiscal policies.

6. Encouraging Bank Lending and Investment in Other Sectors

Banks with fewer reserves have more capital to invest in infrastructure and housing, among other high-growth investment areas. With higher availability of funds for such investment, the reduction in SLR promotes economic expansion.

What Happens if Banks do Not Maintain Statutory Liquidity Ratio?

If the bank does not maintain a statutory liquidity ratio, RBI levies an annual penalty of 3% over the bank rate for not maintaining liquid assets as SLR. Additionally, RBI charges a 5% fine if the bank fails to pay the penalty on the following working day.

Statutory Liquidity Ratio (SLR) vs Cash Reserve Ratio (CRR)

The SLR and CRR are two essential monetary tools that commercial banks use to regulate the financial system. They serve different purposes. Here are the key differences between them:

Statutory Liquidity Ratio (SLR)	Cash Reserve Ratio (CRR)
Banks must reserve liquid assets, including cash, gold, and government bonds, such as SLR.	Banks must have only cash reserves with the Reserve Bank of India to maintain CRR.
Financial institutions earn returns on assets parked as SLR.	In contrast, financial institutions do not earn returns on cash parked as CRR
SLR works as a tool to control the credit expansion of a bank.	On the other hand, RBI uses CRR as a tool for controlling liquidity in banks.
Banks need to maintain the liquid assets by themselves.	On the other hand, banks must maintain CRR with the Reserve Bank.
The RBI typically sets the SLR rate between 18% and 20% of NDTL. The rate may vary depending on the economic scenario.	The current CRR rate is 4.5% (as per the RBI's latest monetary policy). The RBI may adjust this rate as needed.

Banks worldwide are institutions that securely hold public deposits and offer returns. Nevertheless, this function is risky and requires every bank to be cautious. RBI justifies the policy of statutory liquidity ratio by ensuring banks' solvency and protecting the public's money.

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We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about Statutory Liquidity Ratio

What is the statutory liquidity ratio?

The Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits that commercial banks must keep in liquid assets. The Reserve Bank of India (RBI) sets the SLR and can change it as needed. The current SLR is 18%.

What is the current SLR rate?

As of January 29, 2024, India's Statutory Liquidity Ratio (SLR) is 18%. This means that banks must keep at least ₹18 liquid assets for every ₹100 deposits they hold.

What is the impact of SLR on the base rate?

The SLR would affect the base rate since it raises the cost of funds for banks. Higher SLR necessitates a bank to invest in rather low-yield Government securities, thereby increasing operational costs and interest rates on loans.

What will SLR do to an Investor?

SLR creates a very stable demand for government securities since it helps investors. At the same time, it may limit bank depositors' returns since they must keep low-yielding assets rather than use them to make loans or invest in many higher-return options.

Who decides SLR?

The Reserve Bank of India decides the SLR rate and periodically reviews and revises this rate according to the economy's changes.

Which institutions are required to maintain SLR?

Commercial banks, regional rural banks (RRBs), and certain other financial institutions must maintain the SLR as per the RBI's regulatory guidelines.

What is the purpose of SLR?

SLR aims to ensure that banks have enough liquidity to meet their obligations, control inflation by regulating credit growth, and promote investment in government securities, thus supporting the government's fiscal needs.

How does the SLR work?

Banks must maintain a certain percentage of their net demand and time liabilities in liquid assets like government securities or cash. This reserve requirement reduces the amount available for lending, which helps control inflation and stabilize the financial system.

Are SLR and CRR the same?

No, SLR and CRR are different. SLR is the percentage of NDTL that banks must maintain in liquid assets, while CRR is the percentage of total deposits that banks must keep in cash with the central bank (RBI). SLR allows more flexibility in asset management compared to CRR.

What happens if banks don't maintain SLR?

If banks fail to maintain the required SLR, they may face penalties from the RBI, including fines or restrictions on operations. Non-compliance can also affect the bank's financial stability and market reputation.

Do NBFCs in India need to maintain SLR?

In India, the NBFCs (deposit-taking and non-deposit-taking) are not bound to maintain an SLR.

How is SLR in India calculated?

The formula to calculate SLR is = {liquid assets / Net Demand & Time Liabilities (NDTL)} x 100

What happens if SLR increases?

When the Statutory Liquidity Ratio (SLR) increases, banks have to allocate more funds to meet the requirement, which reduces the amount of money available for lending. This can lead to higher borrowing costs and interest rates for businesses and individuals.