Statutory Liquidity Ratio Meaning

Statutory Liquidity Ratio (SLR) is the required percentage of a bank’s deposits that must be held in safe assets like cash, gold, or government bonds. The current SLR rate set by the RBI in February 2024 is 18%. SLR ensures that banks have enough funds available for immediate needs and financial stability. 

What Is Statutory Liquidity Ratio?

The Statutory Liquidity Ratio (SLR) is a regulation requiring banks to hold a certain percentage of their deposits in safe assets, such as cash, gold, or government bonds. This requirement supports the bank’s ability to meet short-term obligations and ensures liquidity.

The SLR serves multiple purposes in the banking system. By mandating that banks maintain a portion of their deposits as liquid assets, it controls credit expansion, as banks can only lend remaining funds. This reserve also helps stabilize the banking sector by reducing the risk of sudden cash shortages, which strengthens public confidence. The SLR rate is set by the central bank and can be adjusted to align with economic needs, controlling inflation and liquidity in the market.

Statutory Liquidity Ratio Example

An example of a Statutory Liquidity Ratio (SLR) is when a bank is required to keep a portion of its deposits in safe assets. For instance, if a bank’s SLR is 20%, it must hold 20% of its total deposits in assets like cash, gold, or government securities to maintain liquidity.

Let’s break down an example. Suppose a bank has total deposits of ₹1,000 crore, and the SLR set by the central bank is 20%. This means the bank must hold 20% of ₹1,000 crore, which is ₹200 crore, in liquid assets. These assets could include ₹100 crore in government bonds, ₹50 crore in gold, and ₹50 crore in cash. This requirement limits the bank’s lending to the remaining ₹800 crore, reducing credit flow and risk in the financial system.

How Does Statutory Liquidity Ratio Work?

The Statutory Liquidity Ratio (SLR) works by requiring banks to maintain a specific portion of their deposits in liquid assets, like cash, government bonds, or gold. This reserve ensures banks can meet short-term financial obligations, promoting stability and liquidity within the banking sector. 

Here’s how the SLR process works step by step:

1. Determination of SLR Rate: The central bank sets the SLR rate based on economic goals, impacting how much money banks can lend.

2. Calculation of Required Reserves: Banks calculate the required liquid reserves as a percentage of their net demand and time liabilities (total deposits).

3. Maintenance of Liquid Assets: Banks hold the required portion of assets in cash, government securities, or gold, ensuring liquidity.

4. Periodic Reporting: Banks report their SLR compliance to the central bank regularly, showing they meet the reserve requirements.

5. Impact on Credit Availability: A higher SLR means less money available for loans, which can control inflation, while a lower SLR increases lending capacity.

Statutory Liquidity Ratio Formula

The formula for Statutory Liquidity Ratio (SLR) is: SLR = (Liquid Assets / Net Demand and Time Liabilities) × 100. This means that banks must maintain a specified percentage of their total deposits as liquid assets. This percentage is set by the central bank.

For example, let’s assume a bank has liquid assets totaling ₹150 crore and total deposits, or net demand and time liabilities (NDTL), of ₹1,000 crore. Using the SLR formula, the bank’s SLR would be: SLR = (₹150 crore / ₹1,000 crore) × 100 = 15%. This means the bank has set aside 15% of its deposits in liquid assets to meet SLR requirements, ensuring it has funds for short-term obligations and supports credit control.

Objectives of SLR

The main objective of the Statutory Liquidity Ratio (SLR) is to ensure that banks maintain a sufficient level of liquid assets, such as cash and government securities. This reserve helps stabilize the banking system, promotes liquidity, and ensures financial security.

• Controlling Credit Growth: The SLR requires banks to hold a portion of deposits in liquid assets, limiting the funds they can lend. By reducing available loanable funds, SLR helps control credit growth, minimizing the risk of excessive borrowing and potential financial instability.
• Managing Inflation: A higher SLR reduces the amount of money banks can lend, lowering the money supply in the economy. This control over money flow can help manage inflation by curbing excessive consumer spending and borrowing, thereby stabilizing the economy.
• Encouraging Investment in Government Securities: SLR mandates that banks hold a portion of assets in government bonds, creating stable demand for these securities. This demand supports government funding needs and ensures a reliable market for public financing, strengthening the overall financial system.
• Strengthening Financial Stability: By requiring banks to hold liquid reserves, SLR increases their ability to meet withdrawal demands from depositors. This liquidity buffer enhances public trust in the banking sector, contributing to stability and reducing the risk of sudden financial crises.
• Supporting Economic Policy: The central bank adjusts the SLR rate to align with broader economic goals. A higher SLR can restrict lending to control inflation, while a lower SLR can increase lending, aiding in economic expansion and supporting targeted monetary policies.

Components of Statutory Liquidity Ratio

The main components of the Statutory Liquidity Ratio (SLR) include cash, gold, and government securities. Banks are required to maintain these assets in specific proportions to meet the SLR, ensuring they have enough liquidity to cover immediate financial obligations and risks.

• Cash: Banks maintain a portion of their SLR requirement in cash. This allows for quick access to funds, enabling banks to meet short-term liquidity needs without having to liquidate other assets.
• Gold: Banks can hold a percentage of the SLR in gold. As a highly liquid and valuable asset, gold adds stability and security to the bank’s reserve, reducing the risk of asset depreciation.
• Government Securities: A significant part of SLR is held in government bonds or securities, providing banks with stable, long-term investment options that are also relatively low-risk. These securities generate returns while fulfilling reserve requirements.

Uses of Statutory Liquidity Ratio

The primary use of the Statutory Liquidity Ratio (SLR) is to maintain liquidity within the banking system. By requiring banks to hold a portion of their deposits in liquid assets, the SLR helps ensure financial stability, control inflation, and safeguard public deposits.

Additional uses of SLR include:

1. Supporting Monetary Policy: The central bank adjusts the SLR to influence credit availability. Raising the SLR can restrict lending, curbing inflation, while lowering it can boost lending, supporting economic growth.
2. Enhancing Financial Security: SLR requires banks to hold assets in cash, gold, or government securities, ensuring that they have funds available for sudden withdrawals or financial obligations, thereby enhancing customer confidence in the banking system.
3. Stabilizing Government Securities Market: By mandating investment in government securities, SLR ensures steady demand, stabilizing the bond market and providing the government with consistent financial support for funding its initiatives.

Differences Between CRR and SLR

The main difference between the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) is that CRR mandates banks to hold a portion of deposits in cash with the central bank, while SLR requires banks to hold liquid assets like cash, gold, or government securities in-house.

SLR in India – Quick Summary

• Statutory Liquidity Ratio (SLR) requires banks to hold a specific percentage of their deposits in safe assets like cash, gold, or government securities, ensuring banks can meet short-term obligations and maintain liquidity.
• SLR is a regulatory reserve requiring banks to maintain a certain portion of deposits in liquid assets. It serves to ensure that banks have enough readily available funds for emergency needs.
• For example, if a bank has deposits totaling ₹1,000 crore and the SLR is 20%, it must hold ₹200 crore in liquid assets such as government bonds, gold, or cash to meet requirements.
• SLR works by mandating banks to hold a percentage of deposits in liquid assets. Banks calculate their reserve needs based on deposits, maintain required assets, and report compliance regularly to the central bank.
• The SLR formula is SLR = (Liquid Assets / Net Demand and Time Liabilities) × 100. This ratio helps banks determine the percentage of deposits needed in liquid reserves for stability.
• The primary objective of SLR is to ensure banks maintain adequate liquidity. By holding liquid assets, SLR helps promote financial stability and prevent potential cash shortages within the banking sector.
• SLR components include cash, government securities, and gold. These assets allow banks to maintain liquidity, meet central bank requirements, and create a buffer against financial stress and market fluctuations.
• SLR’s main use is to maintain banking liquidity, requiring banks to reserve part of deposits in liquid assets. This reserve strengthens the banking system by ensuring funds are available for withdrawals.
• The key difference between CRR and SLR is that CRR requires banks to keep a cash reserve with the central bank, whereas SLR mandates banks to hold liquid assets internally.
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