The Statutory Liquidity Ratio (SLR) is a regulatory rule that tells banks how much of their deposits must be kept in safe, liquid assets instead of being lent out. This requirement is set by the Reserve Bank of India and applies to all scheduled commercial banks in India.
SLR plays a quiet but critical role in the banking system. It controls how aggressively banks can lend, keeps a check on liquidity risk, and supports overall financial stability. By deciding the minimum level of liquid assets banks must hold, SLR directly influences credit flow, interest rates, and risk management.
For banks and financial institutions in India, SLR is not optional. It is a daily compliance requirement that shapes lending decisions and balance sheet planning.
Key Takeaways
- Statutory Liquidity Ratio (SLR) is the least share of deposits banks need to hold in liquid assets
- It is mandated and regulated by the Reserve Bank of India
- SLR limits excessive lending and supports banking system stability
- Changes in SLR affect credit availability, interest rates, and market liquidity
What is the Statutory Liquidity Ratio (SLR)?
The Statutory Liquidity Ratio is the minimum percentage of deposits that banks in India must hold as liquid assets. The Reserve Bank of India sets this requirement and applies it to all scheduled commercial banks.
In simple terms, SLR tells banks how much of their total deposits cannot be freely lent out and must instead be kept in safe, readily available assets.
Within the Indian banking system, SLR works as a regulatory control. It helps the RBI manage liquidity, limit excessive lending, and keep banks financially stable during periods of stress.
Components of SLR
The Statutory Liquidity Ratio is made up of the following assets:
- Cash held by the bank
- Gold, valued as per RBI norms
- Government-approved securities, including Treasury Bills, central government bonds, and State Development Loans
Only assets that meet RBI guidelines are counted while calculating SLR.
How SLR Works
SLR works by linking a bank’s lending capacity to the deposits it holds. Banks must calculate their SLR based on Net Demand and Time Liabilities (NDTL) and maintain the required ratio on an ongoing basis.
SLR Formula
The SLR is calculated using the following calculation:
SLR (%) = (Liquid Assets ÷ Net Demand and Time Liabilities) × 100
Where:
- Liquid Assets include cash, gold, and approved government securities
- Net Demand and Time Liabilities (NDTL) represent the total deposits a bank owes to customers
If the RBI increases SLR, banks must hold more liquid assets and lend less. If SLR is reduced, banks get more room to extend credit.
Calculating the Statutory Liquidity Ratio
The Statutory Liquidity Ratio is calculated by comparing a bank’s eligible liquid assets with its Net Demand and Time Liabilities (NDTL). Banks are required to maintain this ratio on a continuous basis as per regulatory norms.
The calculation follows a fixed formula:
SLR (%) = (Liquid Assets ÷ Net Demand and Time Liabilities) × 100
This ratio shows how much of a bank’s deposit base is locked into liquid, low-risk assets.
Simple SLR calculation example
Assume a bank has:
- Net Demand and Time Liabilities of ₹1,000 crore
- Eligible liquid assets worth ₹180 crore
SLR = (180 ÷ 1,000) × 100
SLR = 18%
This means the bank is holding 18% of its deposits in SLR-approved assets.
The Importance of the Statutory Liquidity Ratio
The Statutory Liquidity Ratio plays a key role in keeping the banking system stable and controlled. It acts as a safeguard against excessive risk-taking by banks.
Role of SLR in financial stability
By requiring banks to hold safe assets, SLR:
- Reduces the risk of liquidity shortages
- Creates a buffer during financial stress
- Supports confidence in the banking system
How SLR manages liquidity
SLR directly influences how much banks can lend:
- A higher SLR restricts lending by locking more funds in liquid assets
- A lower SLR frees up funds, allowing banks to extend more credit
This makes SLR a practical tool for managing system-wide liquidity.
Impact on inflation and monetary policy
SLR also supports monetary policy goals set by the Reserve Bank of India:
- Higher SLR can help slow credit growth and control inflation
- Lower SLR can support credit expansion during slow economic phases
Through these adjustments, SLR helps balance growth and price stability.
Impact of SLR on Banks and Economy
The Statutory Liquidity Ratio has a direct impact on how banks operate and an indirect impact on the broader economy. Even small changes in SLR can influence lending behaviour, liquidity conditions, and credit growth.
Impact of SLR on banks
SLR affects how much freedom banks have to use their deposits.
- Higher SLR
- A larger portion of deposits is locked into liquid assets
- Less money is available for lending
- Loan growth may slow, especially in credit-heavy sectors
- Lower SLR
- Banks can deploy more funds as loans
- Credit availability improves
- Banks get more flexibility in balance sheet management
Because SLR must be maintained continuously, banks factor it into daily treasury and lending decisions.
Impact of SLR on the economy
Through its effect on banks, SLR influences overall economic activity.
- When SLR is raised, credit expansion slows, which can help cool inflationary pressure
- When SLR is lowered, lending picks up, supporting consumption and investment
- Liquidity conditions in financial markets adjust gradually based on these changes
The Reserve Bank of India uses SLR as a supporting tool within monetary policy to balance growth with financial stability.
Statutory Liquidity Ratio vs. Cash Reserve Ratio (CRR)
The comparison below shows how SLR and CRR work together as regulatory tools, each influencing bank liquidity differently:
| Basis | Statutory Liquidity Ratio (SLR) | Cash Reserve Ratio (CRR) |
| Meaning | Minimum share of deposits banks must hold in liquid assets | Minimum share of deposits banks must keep as cash |
| Regulating authority | Set by the Reserve Bank of India | Set by the Reserve Bank of India |
| Form of maintenance | Cash, gold, and approved government securities | Cash only |
| Where funds are kept | With the bank itself | With the RBI |
| Return earned | Banks may earn interest on government securities | No return earned |
| Impact on lending | Limits how much banks can lend | Directly reduces funds available for lending |
| Policy purpose | Controls liquidity and supports financial stability | Absorbs excess liquidity from the banking system |
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Conclusion
The Statutory Liquidity Ratio is a core part of India’s banking framework. It requires banks to keep a fixed portion of their deposits in safe and liquid assets, as prescribed by the RBI. This limits excessive lending and keeps banks prepared to meet their obligations.
By controlling how much money banks can lend, SLR supports financial stability and helps manage liquidity across the system. Changes in SLR also affect monetary policy, influencing credit flows and inflation conditions.
For investors, SLR should be seen as a system-level signal, not a stock-specific trigger. It reflects the regulator’s stance on liquidity and risk, and its effects gradually show up through interest rates, lending conditions, and market liquidity rather than in immediate price movements.
FAQs on what is Statutory Liquidity Ratio (SLR) is
Assets that qualify under the Statutory Liquidity Ratio are low-risk and highly liquid holdings that banks must maintain as per RBI rules. These include:
Cash held by the bank
Gold, valued as per RBI guidelines
Government-approved securities such as Treasury Bills, dated government bonds, and State Development Loans
These assets remain on the bank’s balance sheet and must meet regulatory conditions to be counted toward SLR.
If a bank does not meet the Statutory Liquidity Ratio requirement, it faces penal action from the regulator. This includes:
Penal interest on the amount of shortfall
Higher cost than normal borrowing rates
Increased regulatory supervision if non-compliance continues
Because of this, banks track SLR compliance on a daily basis.
A change in the Statutory Liquidity Ratio affects a common investor indirectly through banking and credit conditions.
When SLR is increased, banks have less money to lend, which can keep loan rates firm
When SLR is reduced, banks can lend more freely, improving credit availability and easing borrowing costs
These shifts influence loan rates, liquidity, and overall market activity.
SLR requirements are largely the same across all banks in India.
The Reserve Bank of India sets a uniform SLR for all scheduled commercial banks
Public sector, private, and foreign banks follow the same prescribed ratio
Individual banks may still hold SLR above the minimum based on internal risk policies.
Investors can stay informed about Statutory Liquidity Ratio changes through official RBI communications. The most reliable sources include:
RBI monetary policy announcements
RBI press releases and circulars
Coverage of RBI policy decisions in financial news
SLR updates are usually announced as part of broader monetary policy measures.
Disclaimer
The information provided in this article is for educational and informational purposes only. It should not be considered as financial or investment advice. Investing in stocks involves risk, and it is important to conduct your own research and consult with a qualified financial advisor before making any investment decisions. The author and publisher are not responsible for any financial losses or gains that may result from the use of this information.
