What is Statutory Liquidity Ratio (SLR)? Definition and meaning

Definition of Statutory Liquidity Ratio (SLR)

An educational and visually engaging illustration of the Statutory Liquidity Ratio (SLR) concept. The image shows a commercial bank maintaining a portion of its funds as liquid assets, including cash, gold, and government-approved securities, with clear labels for each. A pie chart represents the breakdown of funds into SLR reserves and lending capacity. The Reserve Bank of India (RBI) is depicted as a guiding entity overseeing this process. Use professional and clear visuals to emphasize the role of SLR in controlling liquidity and supporting government financing. - Legal Sandook — An educational and visually engaging illustration of the Statutory Liquidity Ratio (SLR) concept. Legal Sandook

The Statutory Liquidity Ratio (SLR) is the percentage of a commercial bank’s net demand and time liabilities (NDTL) that it is required to maintain in the form of liquid assets such as cash, gold, or approved government securities before offering credit to customers. This reserve is mandated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949.

The SLR serves as a regulatory requirement to ensure the liquidity, financial stability, and credit discipline of the banking system.

Meaning of SLR

Liquidity Buffer:
- SLR ensures that banks maintain a portion of their funds in liquid and easily accessible forms, which can be utilized during times of financial stress or emergencies.
Control Over Credit:
- By adjusting the SLR, the RBI controls the amount of funds that banks can use for lending, thereby influencing the credit supply in the economy.
Government Financing:
- Since banks are required to hold government-approved securities, the SLR indirectly helps fund government borrowing by creating a captive market for such securities.

Key Features of SLR

Components:
- Banks maintain their SLR through a combination of:
  - Cash (apart from the cash reserved for CRR),
  - Gold (valued as per RBI guidelines), and
  - Government-approved securities like bonds and treasury bills.
Determination:
- The RBI sets the SLR and can adjust it to manage liquidity and credit in the economy. The maximum limit for SLR, as per law, is 40% of NDTL, while the minimum is 0%.
Legal Requirement:
- Failing to maintain the prescribed SLR attracts penalties as stipulated by the RBI, ensuring compliance.

Objectives of SLR

Maintain Liquidity: Ensure that banks have sufficient liquid assets to meet obligations and customer withdrawals.
Control Inflation: By increasing SLR, the RBI can reduce money supply in the economy, curbing inflation. Conversely, a lower SLR boosts liquidity and credit flow, stimulating economic growth.
Support Fiscal Stability: The SLR requirement helps in financing the government’s fiscal deficit by ensuring a steady demand for government securities.

Impact of SLR Changes

Increase in SLR:
- Reduces the funds available for lending.
- Controls inflation by restricting money flow in the economy.
- Encourages investment in government securities.
Decrease in SLR:
- Increases funds available for lending.
- Stimulates credit growth and economic activity.
- Boosts liquidity in the financial system.

Example

If the SLR is set at 18% and a bank has ₹1,000 crore in NDTL, the bank must maintain ₹180 crore in the form of liquid assets such as government bonds, gold, or cash.

Significance of SLR

Ensures Solvency: Prevents banks from overextending their credit operations, ensuring they remain financially stable.
Economic Control: Acts as a key monetary policy tool to influence credit flow, inflation, and growth.
Encourages Investments: Promotes the purchase of government securities, aiding public financing needs.

In summary, the Statutory Liquidity Ratio (SLR) is a critical tool used by the RBI to regulate the banking sector, control liquidity, and support fiscal stability while ensuring economic growth.