SLR stands for Statutory Liquidity Ratio and is an important ratio that the bank has to maintain to ensure they are operating the bank as per the norms set by the RBI.
Here in this guide, we will discuss what is the SLR, how SLD works, Why the SLR ratio is important to maintain and much more.
What is the SLR?
The statutory Liquidity Ratio can be defined as the percentage of deposits that a commercial bank is required to maintain through gold, cash, and other securities all the time.
RBI in their guidelines makes it mandatory to ensure there is enough liquidity with the bank should it be required and the bank users do not face any issues when it comes to people wanting to take their money out of the bank account.
The Current SLR in India is 18.00% meaning a bank has to maintain a minimum of 18% of the total deposit that they receive with themselves at any given time.
Every commercial bank conducts its operations by accepting deposits from various customers and segregating the received funds into two categories.
The initial portion of the funds is stored as part of the Statutory Liquidity Ratio (SLR) reserve within the bank, while the remaining portion is utilized to extend loans to other entities.
How Does the Statutory Liquidity Ratio Work?
The Reserve Bank of India is responsible for maintaining the banking sector in India, hence, RBI comes with various management policies which the bank has to follow. These policies make the banks behave in such a manner that makes the banking sector secure and away from trouble.
One key policy is the Statutory Liquidity Ratio (SLR), designed to safeguard the interests of individuals.
This policy requires banks to set aside a portion of deposits, ensuring that in the event of fund liquidation needs, the bank can fulfill obligations without resorting to debt. T
his safeguard not only shields the bank from mismanagement but also mitigates the risk of negative cash flows
Now, every bank has a portion of its Net Demand and Time Liabilities (NTDL) in the form of cash, gold, or other liquid assets at the end of the day. The Statutory Liquidity Ratio (SLR) is the ratio of the liquid assets to the demand and time liabilities.
In addition to ensuring security, the Reserve Bank of India (RBI) utilizes the Statutory Liquidity Ratio (SLR) as a tool to regulate cash flow in the market. Since SLR is directly tied to a bank’s capacity to use deposits for lending, it influences the cash circulating in the economy.
RBI adjusts the SLR when it seeks to reduce the cash flow within the economy, a measure taken to stabilize the economy and control inflation. The SLR ratio is overseen by the RBI, which holds the authority to increase this ratio by up to 40%.
Components of Statutory Liquidity Ratio
The Banking Regulation Act of 1949 mandates all banks to maintain the Statutory Liquidity Ration with themselves. Various components of the Statutory Liquidity Ratio constitute this ratio, which is as follows-
Liquid Assets
As the name suggests, Liquid Assets are assets that are liquid like Gold, treasury bills, government-approved securities, government bonds, and cash reserves.
Net Demand and Time Liabilities (NDTL)
NDTL is the total demand and liabilities of the public which is help by the bank with other banks. This demand deposit consists of all the liabilities which the bank has to pay on demand. This includes Current Deposits, Demand Drafts, balances in overdue Fixed Deposits, etc. The Time deposits consist of deposits that are to be paid on maturity and have a certain lock-in period.
SLR Limit
The SLR Limit has an upper limit of 40% with no lower limit, however, RBI maintains the SLR such that it never touches 0 ensuring that the banking sector remains healthy.
Why Statutory Liquidity Ratio is important?
The following are the reasons why maintaining the Statutory Liquidity Ratio (SLR) is important-
Preventing Banks from Over-Liquidating
The Statutory Liquidity Ratio (SLR) in the banking sector serves as a safeguard against excessive liquidation, thereby shielding banks from potential cash crises, particularly during periods of increased customer demand for cash.
The Reserve Bank of India (RBI) uses the SLR regulations to manage the availability of credit within banks and to protect the interests of account holders, ensuring the safety of their funds in the event they need to access them.
Controlling the Inflation and Economy
The Reserve Bank of India (RBI) adjusts the Statutory Liquidity Ratio (SLR) to regulate the cash flow into the economy, either by increasing or decreasing the SLR limit. This, in turn, helps manage inflation in the country by controlling the inflow or reduction of cash within the economy.
Difference between SLR & CRR
The RBI implements various monetary policies to control the banking sector. Two such policies are SLR and CRR, which may seem similar but serve different purposes. The following outlines the differences between SLR and CRR:
| Statutory Liquidity Ratio (SLR) | Cash Reserve Ratio (CRR) |
| In the Cash Reserve Ratio (CRR), the banks must maintain the cash reserve with the Reserve Bank of India. | In the Cash Reserve Ratio (CRR), the banks have to maintain the cash reserve with the Reserve Bank of India. |
| Banks earn interest on the maintained Statutory Liquidity Ratio (SLR). | There are no provisions for returns on the Cash Reserve Ratio (CRR). |
| SLR’s purpose is to control the bank’s ability to deposit money into the credit tools like loans, credit cards, etc. | CRR’s purpose is to maintain the cash flow in the banking system. |
FAQ
SLR stands for Statutory Liquidity Ratio.
CRR stands for Cash Reserve Ratio.
Commercial banks also require loans to conduct their operations. They obtain these loans from the Reserve Bank of India (RBI) at a specified lending rate set by the RBI, known as the Repo Rate.
No, Banks can maintain SLR in multiple assets like gold, cash, government bonds, or approved securities which come under the safe investment category.
