Statutory Liquidity Ratio (SLR)- Definition, Objective

Introduction to SLR: The Statutory Liquidity Ratio is like a savings rule for banks in India. It’s a certain amount of money, a percentage of the deposits they receive, that banks must keep aside. This money can be in the form of gold, cash, or other types of safe investments. The Reserve Bank of India (RBI), which is like the boss of all banks in India, uses SLR as one way to control how much money banks can lend and how much they can take in deposits.

Understanding terms like SLR, CRR, OMO, and others is important if you’re studying the Indian Economy for exams like the UPSC Civil Services Examination (CSE). In this article, we’ll focus on SLR and what it means for banks and the economy.

Statutory Liquidity Ratio (SLR)

The Statutory Liquidity Ratio (SLR) is a tool used by the central bank, RBI, to control liquidity in the economy. It requires commercial banks to set aside a portion of their Net Time and Demand Liabilities (NTDL) in the form of approved assets such as gold, cash, government securities, or other RBI-approved securities. Banks usually invest in government securities to meet SLR requirements and earn interest.

Unlike the Cash Reserve Ratio (CRR), each commercial bank keeps its SLR in its vault. The specific percentage of SLR is determined by the Reserve Bank of India and changes based on economic conditions. As of 08 June 2023, the RBI has set the SLR at 18%, meaning that all banks must hold 18% of their Net Time and Demand Liabilities in approved assets.

Why is SLR Fixed?

The reason behind adhering to the Statutory Liquidity Ratio (SLR) is as follows:

• To prevent commercial banks from becoming too liquid.
• To manage inflation by adjusting the SLR percentage, increasing it can help control inflation.
• During economic downturns, reducing the SLR percentage can boost bank lending to stimulate the economy.
• Ensuring the financial stability of commercial banks.
• The requirement to maintain SLR encourages banks to invest in government securities, providing opportunities for the government to sell its debt instruments and securities.

Major Component of SLR

Section 24 and Section 56 of the Banking Regulation Act 1949 require various banks in India to uphold the Statutory Liquidity Ratio (SLR). This encompasses scheduled commercial banks, local area banks, Primary (Urban) co-operative banks (UCBs), state co-operative banks, and central co-operative banks.

Components of SLR include:

1. Liquid Assets: Assets easily convertible into cash such as gold, treasury bills, government-approved securities, government bonds, and cash reserves. This category also encompasses securities under Market Stabilisation Schemes and Market Borrowing Programmes.
2. Net Demand and Time Liabilities (NDTL):
   Demand Deposits: Liabilities payable upon request, including current deposits, demand drafts, overdue balances in fixed deposits, and the demand liabilities segment of savings bank deposits.
   Time Deposits: Repayable upon maturity, requiring waiting until the lock-in tenure is complete. Examples comprise fixed deposits, the time liabilities segment of savings bank deposits, and staff security deposits.
3. The SLR limit varies, ranging from an upper threshold of 40% to a lower limit of 23%.

Main Objective of SLR

To prevent excessive liquidation by commercial banks:

1. Without the Statutory Liquidity Ratio (SLR), banks or financial institutions might undergo over-liquidation, particularly when the Cash Reserve Ratio increases and urgent funds are required.
2. The Reserve Bank of India (RBI) employs SLR regulations to manage bank credit, ensuring commercial banks maintain solvency and channel their investments toward government securities.

To regulate the flow of bank credit:

1. During inflationary periods, the RBI elevates SLR to manage bank credit and stabilize the overall economic landscape.
2. Conversely, in times of recession, the RBI reduces SLR to encourage and expand bank credit, facilitating economic recovery.

Difference Between SLR and CRR

Below are listed some of the major differences between the two types of reserve ratios, namely SLR and CRR.

Bank Rate

The bank rate is the interest rate set by a central bank for lending to commercial banks. When commercial banks face a shortage of funds, they can borrow money from the central bank of the country. In India, this central bank is the Reserve Bank of India (RBI). The lending process operates according to the monetary policy of the country. Essentially, the bank rate represents the rate at which the RBI provides loans to commercial banks without requiring any security.

Working of Statutory Liquidity Ratio

• Every bank must reserve a specific portion of their Net Demand and Time Liabilities (NDTL) as cash, gold, or other liquid assets by day’s end.
• The ratio of these liquid assets to the demand and time liabilities is termed as the Statutory Liquidity Ratio (SLR).
• The Reserve Bank of India (RBI) has the authority to increase this ratio, capped at an upper limit of 40%.
• An increase in the SLR restricts the bank’s ability to inject money into the economy.
• RBI manages money flow and price stability to operate the Indian economy, with SLR being one of its monetary policies.
• SLR, along with other tools, plays a crucial role in ensuring the solvency of banks and maintaining cash flow in the economy.

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