SLR full form stands for Statutory Liquidity rRatio. It is a monetary policy tool that the Reserve Bank of India (RBI) uses to assess the liquidity at the banks’ disposal.
SLR requires banks to keep a certain amount of their money invested in specific central and state government securities.
Statutory Liquidity Ratio popularly called SLR is the minimum percentage of deposits that the commercial bank maintains through gold, cash and other securities. However, these deposits are maintained by the banks themselves and not with the RBI or Reserve Bank of India.
What is Statutory Liquidity Ratio (SLR)
SLR refers to the percentage of the aggregate deposits that commercial banks have to invest in liquid assets. The RBI has specified such liquid assets which banks have to invest in to maintain their SLR.
As per RBI, liquid assets may be maintained –
(i) in cash, or
(ii) in gold valued at a price not exceeding the current market price, or
(iii) Unencumbered investment in approved securities
‘Approved Securities’ means those securities that are issued by the Central Government or any State Government or other securities that are specified by the RBI from time to time. The RBI specifies the SLR status of securities issued by the Government of India and the State Governments.
Here are a few examples of approved SLR securities:
- Dated securities of the Government of India
- Treasury Bills of the Government of India
- Dated securities of the Government of India are issued from time to time under the market borrowing program and the Market Stabilisation Scheme.
- State Development Loans (SDLs) are issued from time to time under their market borrowing program.
- Any other instrument may be notified by the Reserve Bank of India.
NDTL, in banking parlance, is the aggregate of savings account, current account, and fixed deposit balances held by a bank. So banks have to keep 18% (or whatever the statutory liquidity ratio rate is) of their aggregate deposits with the RBI in the form of liquid securities.
As opposed to CRR, in the Statutory Liquidity Ratio, the bank does earn some interest from the government security they invest in.
All banks that are administered by the RBI have to maintain SLR and CRR.
How does Statutory Liquidity Ratio work
Every bank must have a particular portion of their Net Demand and Time Liabilities (NDTL) in the form of cash, gold, or other liquid assets by the end of the day. The ratio of these liquid assets to the demand and time liabilities is called the Statutory Liquidity Ratio (SLR). The Reserve Bank of India (RBI) has the authority to increase this ratio by up to 40%.
An increase in the ratio constricts the ability of the bank to inject money into the economy. RBI is also responsible for regulating the flow of money and stability of prices to run the Indian economy. Statutory Liquidity Ratio is one of its many monetary policies for the same. SLR (among other tools) is instrumental in ensuring the solvency of the banks and cash flow in the economy.
Objectives of SLR
1) One of the main objectives is to prevent commercial banks from liquidating their liquid assets when the RBI raises the CRR.
2) SLR is used by the RBI to control credit flow in the banks.
3) In a way, SLR rate also makes commercial banks invest in government securities.
4) Making banks invest a portion of their deposits in government securities also ensures the solvency of such banks.
5) SLR might be a monetary policy tool, but it has also helped the government sell a lot of its securities. So SLR helps in the government’s debt management program and RBI’s monetary policy as well.
Components of Statutory Liquidity Ratio
Section 24 and Section 56 of the Banking Regulation Act 1949 mandates all scheduled commercial banks, local area banks, Primary (Urban) co-operative banks (UCBs), state co-operative banks and central co-operative banks in India to maintain the SLR. It becomes pertinent to know in detail about the components of the SLR, as mentioned below.
Liquid Assets
These are assets one can easily convert into cash – gold, treasury bills, govt-approved securities, government bonds, and cash reserves. It also consists of securities, eligible under Market Stabilisation Schemes and those under the Market Borrowing Programmes.
Net Demand and Time Liabilities (NDTL)
NDTL refers to the total demand and time liabilities (deposits) of the public that are held by the banks with other banks. Demand deposits consist of all liabilities, which the bank needs to pay on demand. They include current deposits, demand drafts, balances in overdue fixed deposits, and demand liabilities portion of savings bank deposits.
Time deposits consist of deposits that will be repaid on maturity, where the depositor will not be able to withdraw his/her deposits immediately. Instead, he/she will have to wait until the lock-in tenure is over to access the funds. Fixed deposits, time liabilities portion of savings bank deposits, and staff security deposits are some examples. The liabilities of a bank include call money market borrowings, certificate of deposits, and investment deposits in other banks.
SLR Limit
SLR has an upper limit of 40% and a lower limit of 23%. Click here to read more on CRR & Repo Rate
Uses of Statutory Liquidity Ratio (SLR)
As the chief monetary authority of our economy, RBI is responsible for handling cash flows, inflation levels, and price levels in the country.
To carry out its functions efficiently, RBI has many tools at its disposal. These include; Repo rate, reverse repo rate, marginal standing facility, bank rate, open market operations, moral suasion, CRR, SLR, and a few others.
In many ways, SLR also helps RBI control inflation. Raising SLR makes banks park more money in government securities and reduce the level of cash in the economy. This helps raise price levels and inflation in the economy. Doing the opposite helps maintain cash flow in the economy. Reducing SLR leaves more liquidity with banks, which in turn can fuel growth and demand in the economy.
This is how changing the SLR ratio also helps RBI maintain bank credit flow.
Differences Between CRR and SLR
S.No. | CRR | SLR |
1. | CRR requires banks to keep a certain amount of their aggregate deposits in cash with the RBI | SLR requires banks to keep a certain amount of their aggregate deposits in liquid assets. |
2. | Banks do not earn any interest from the RBI in case of the cash parked with RBI under CRR requirements. | Banks earn interest. This is because, under SLR requirements, banks are supposed to invest in liquid assets like central and state government securities/bonds. These bonds earn banks some interest. |
FAQs
Who decides the SLR?
The Reserve Bank of India (RBI) decides the Statutory Liquidity Ratio which is required to be maintained by other banks.
How SLR is calculated?
SLR = [Liquid Assets / (Net Demand + Time Liabilities)] × 100
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