Statutory Liquidity Ratio (SLR), Definition, Objective

Statutory Liquidity Ratio (SLR), Definition, Objective, Impact

Statutory Liquidity Ratio (SLR) is minimum percentage of a bank's NDTL that must maintain in the form of specified liquid assets. Get all about SLR's Definition, Objective for UPSC Exam.

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Statutory Liquidity Ratio

The Statutory Liquidity Ratio (SLR) is a regulatory requirement imposed on commercial banks by the central bank or monetary authority of a country. It refers to the proportion of a bank’s net demand and time liabilities (NDTL) that it must maintain in the form of specified liquid assets such as cash, gold, or government-approved securities.

What is NDTL?

NDTL is a term used in the banking sector to refer to the aggregate of a bank’s liabilities that are payable on demand or within a specific period of time. NDTL includes both the deposits made by customers that can be withdrawn on demand (demand liabilities) and those that are payable after a specified period (time liabilities).

Read about: Bank Rate

Statutory Liquidity Ratio Objectives

The importance of the Statutory Liquidity Ratio (SLR) lies in its role in ensuring the liquidity and stability of banks, as it mandates them to maintain a certain portion of their liabilities in liquid assets. This helps banks meet payment obligations, cover unforeseen liquidity needs, maintain public confidence, and provides a tool for the central bank to regulate credit expansion and money supply in the economy.

Statutory Liquidity Ratio in India

In India, the Statutory Liquidity Ratio (SLR) is determined and regulated by the Reserve Bank of India (RBI), which is the country’s central bank. The RBI is responsible for formulating and implementing monetary policy in India, including setting the SLR requirements for commercial banks.

The SLR in India is not fixed and can be changed by the RBI based on various factors and considerations. However, RBI has kept the upper limit of SLR at 40%. The frequency of changes to the SLR requirement can vary depending on the prevailing economic conditions and policy objectives. Historically, the RBI has adjusted the SLR periodically to manage liquidity in the banking system and achieve macroeconomic goals.

Some of the factors that may lead to changes in the SLR include:

Monetary Policy Objectives

The RBI may change the SLR to align with its monetary policy objectives. For example, if the RBI aims to stimulate economic growth and encourage credit expansion, it may lower the SLR requirement to free up funds for lending by banks. Conversely, if the RBI wants to tighten liquidity and curb inflationary pressures, it may increase the SLR requirement, thus reducing the funds available for lending.

Liquidity Conditions

Changes in liquidity conditions in the banking system, such as excess liquidity or liquidity shortages, can influence the SLR. If there is a surplus liquidity situation, the RBI may reduce the SLR to inject more funds into the market. In contrast, if there is a liquidity deficit, the RBI may raise the SLR to absorb excess funds and maintain stability.

Inflation and Price Stability

The RBI considers Inflation as a crucial factor in setting monetary policy. If there are concerns about rising inflationary pressures, the RBI may increase the SLR to restrict credit expansion and control excess liquidity in the system.

Economic and Financial Stability

The RBI monitors economic and financial stability indicators and adjusts the SLR accordingly. Changes in macroeconomic factors such as GDP growth, exchange rates, fiscal deficit, and external sector developments can influence the SLR.

It’s important to note that the RBI communicates any changes to the SLR well in advance, giving banks sufficient time to adjust their portfolios and comply with the new requirements. Banks are required to maintain the prescribed SLR ratio on a daily basis, and failure to meet the SLR requirement can attract penalties from the RBI.

Read about: Banking System in India

Statutory Liquidity Ratio at Present

The Statutory Liquidity Ratio (SLR) limit in India, which is determined by the Reserve Bank of India (RBI), stands at 18.00% as of February 2022. This rate continues to be applicable in May 2023 also.

Read about: Public Sector Banks

Statutory Liquidity Ratio and Cash Reserve Ratio

Here is a table that gives a comparative analysis of two monetary policy tools, Statutory Liquidity Ratio and Cash Reserve Ratio.

Aspect	Statutory Liquidity Ratio (SLR)	Cash Reserve Ratio (CRR)
Definition	The proportion of a bank’s Net Demand and Time Liabilities (NDTL) that must be maintained in liquid assets.	The proportion of a bank’s Net Demand and Time Liabilities (NDTL) that must be kept as cash reserves with the central bank.
Purpose	Ensures banks maintain a certain level of liquidity and promotes financial stability.	Helps the central bank manage liquidity in the banking system and control inflation.
Regulatory Authority	Determined and regulated by the Reserve Bank of India (RBI).	Determined and regulated by the Reserve Bank of India (RBI).
Eligible Assets	Cash, gold, and government-approved securities.	Cash reserves held as balances with the central bank.
Liquidity Management	Helps banks meet payment obligations and maintain public confidence in the banking system.	Regulates the availability of funds for lending and money supply in the economy.
Frequency of Change	Can be adjusted periodically based on economic conditions and policy objectives.	Can be adjusted periodically based on economic conditions and policy objectives.
Impact on Banks	Determines the minimum investment in specified liquid assets, reducing funds available for lending.	Requires a portion of deposits to be held as cash reserves, limiting funds available for lending.
Penalty for Non-Compliance	Failure to meet the SLR requirement attracts penalties from the RBI.	Failure to meet the CRR requirement results in the bank paying penalty interest to the RBI.

Read about: Private Sector Banks

Statutory Liquidity Ratio UPSC

The topic of Statutory Liquidity Ratio (SLR) is important for UPSC (Union Public Service Commission) as it is a part of the UPSC Syllabus for the Economics section. Aspirants preparing for UPSC exams, need to have a comprehensive understanding of SLR. It is crucial because it reflects the regulatory framework set by the Reserve Bank of India (RBI) to ensure liquidity, stability, and control over the banking system. Knowledge of SLR helps candidates grasp the mechanisms of monetary policy, banking regulations, and their impact on the economy, making it an essential topic for UPSC preparation. Aspirants can leverage UPSC Online Coaching and UPSC Mock Test to have firm grasp on such topics.

Read about: Regional Rural Banks

Statutory Liquidity Ratio FAQs

What is the statutory liquidity ratio of RBI?

The statutory liquidity ratio of RBI is determined by the Reserve Bank of India (RBI) and is subject to change based on monetary policy objectives and economic conditions.

Is SLR is lower than CRR?

No, SLR is not lower than CRR. They are separate regulatory requirements with different purposes.

Which is greater CRR or SLR?

CRR (Cash Reserve Ratio) is greater than SLR in terms of the percentage of NDTL that banks are required to maintain as reserves with the central bank.