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SLR - Statutory Liquidity Ratio

What is a Statutory Liquidity Ratio?

If you are one of the many people who often ask the question, “what is statutory liquidity ratio?”, then you’ve come to the right place. Statutory Liquidity Ratio (SLR) is the mandatory reserve requirement that commercial banks in India are required to maintain in the form of cash, gold, and government-approved securities before providing credit or loans to customers. SLR is determined by the Reserve Bank of India (RBI) to control the expansion of bank loans.

The Cash Reserve Ratio (CRR) and SLR have been the traditional tools of the central bank’s monetary policy to control credit growth, the flow of liquidity, and inflation in the economy. Prescribed by Section 24 (2A) of the Banking Regulation Act of 1949, the SLR is the minimum percentage of the deposit that banks must maintain in liquid form before they can provide customers with credit.

In this article, you’ll learn about the SLR formula, what SLR is, how to calculate SLR, the impact of SLR on the economy, and many more aspects of SLR that you need to understand to make the best financial decisions. 

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How to Calculate SLR

SLR is calculated by a percentage of the total demand and time liabilities of banks. Time liabilities refer to liabilities which commercial banks are liable to pay to the customers after a certain period mutually agreed upon. Demand liabilities are deposits of the customers which are payable on demand at any time.

An example of time liability is a six-month fixed deposit which is not payable on demand but only after six months. An example of demand liability is a deposit maintained in a savings account or current account that is payable on demand through a withdrawal form such as a cheque at any time.

The Formula of SLR Calculation

Here, below, is the formula to use in calculating SLR. It may seem too simplistic, but it’s actually effective and that’s why you should learn it.

SLR = % of Net Demand & Time Liabilities (NDTL)

How Does SLR Work?

Banks 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 ratio of time liabilities is called the Statutory Liquidity Ratio (SLR). Note that the Reserve Bank of India (RBI) has the authority to increase this ratio by up to 40%.

Also, a boost in the ratio constricts the ability of the bank to inoculate money into the economy. RBI is also liable for regulating the flow of money and the stability of prices to run the Indian economy. SLB is one of its several monetary policies for the same. SLR (among other tools) is instrumental in securing the solvency of the banks and cash flow in the economy.

The Difference Between SLR and CRR

SLR and CRR are both components of monetary policy. However, there are a few differences that distinguish one from the other. Here are some of their dissimilarities:

SLR (Statutory Liquidity Ratio) CRR (Cash Reserve Ratio)
SLR is used to control the bank’s leverage for credit expansion. The Central Bank controls the liquidity in the banking system with CRR.
Banks are asked to have reserves of liquid assets which include both cash, gold, and others. The CRR requires banks to have only cash reserves with the RBI.
The securities are kept with the banks themselves, which they need to maintain in the form of liquid assets The cash reserve is maintained by the banks with the RBI.

How SLR Impacts the Economy

The government uses the SLR to regulate inflation and liquidity. Increasing the SLR will control inflation in the economy while decreasing it will cause growth in the economy. Although the SLR is a monetary policy instrument of the RBI, the government needs to make its debt management program successful.

SLR has helped the government to sell its securities or debt instruments to banks. Most of the banks will be keeping their SLR in the form of government securities as it will earn them an interest income.