What is Statutory Liquidity Ratio (SLR) & How to Calculate?

The Full form of "SLR is Statutory Liquidity Ratio." SLR is a minimum percentage of deposits that commercial banks must keep as liquid assets. The Reserve Bank of India can set and change the SLR when necessary.

The Reserve Bank of India maintains various instruments within its monetary policy to administer the Indian economy. It influences commodity prices, cash flow or money supply regulation, and many other economic factors.

The statutory liquidity ratio (SLR) is one financial instrument used by the RBI to maintain banks' solvency.

Read on to learn more about SLR!

The meaning of statutory liquidity ratio is a mandatory reserve requirement that Indian commercial banks must maintain through liquid assets like cash, gold, bonds, PSU, and RBI-approved securities.

The RBI Act mandates that commercial banks maintain a percentage of their net demand and time liabilities (NDTL) as SLR. RBI determines this percentage of SLR to control a bank's expansion.

A change in this ratio controls financial institutions' ability to inject money into our economy. Therefore, the RBI increases it during inflation to restrict banks and NBFCs from providing loans.

RBI fulfills the following objectives through the statutory liquidity ratio in India:

• SLR controls the bank to oversupply liquid money in the public's hands.
• It controls the money supply and currency flow in our economy.
• It becomes a crucial instrument to tackle both inflation and deflation.
• It ensures the solvency of all financial institutions by improving their monetary supply.
• SLR assists the government's debt management strategies.
• It encourages investments in government securities.

1. Liquid Assets

2. Net Demand and Time Liabilities (NDTL)

To calculate the Statutory Liquidity Ratio (SLR), you need to determine the bank's Net Demand and Time Liabilities (NDTL) and apply the required SLR percentage set by the central bank (e.g., the Reserve Bank of India). Here's how to calculate it:

SLR Formula:

SLR=Liquid Assets​/Net Demand and Time Liabilities (NDTL)×100

SLR Calculation With an Example:

Suppose a bank has:

• NDTL = ₹500 Crores
• Liquid Assets = ₹150 Crores
• If the required SLR is 18% (as per RBI's requirement), the calculation would be:

SLR = 150/500×100 = 30%

This means the bank maintains 30% of its NDTL in liquid assets, above the required 18% SLR.

The Statutory Liquidity Ratio (SLR) applicable in India is 18% as of January 29, 2024. This means that commercial banks are required to maintain liquid assets amounting to a minimum of ₹ 18 for every ₹100 deposits held by the bank. This SLR ensures the safety of the banks and lowers the general risk rate.

The Reserve Bank Of India (RBI) determines and regulates SLR, where the SLR ratio can range between 23 and 40%. He can raise the SLR to 40%. All Indian banks must furnish their SLR position to the RBI every 7th day of the week. Any bank that fails to satisfy one SLR requirement is said to suffer a loss or danger from RBI.

The following are the institutions for which RBI must maintain a statutory liquidity ratio.

• Scheduled Commercial Banks.
• Non-scheduled Commercial Banks.
• Co-operative Banks (both state and central).
• Urban Co-operative Banks (UCB)
• Small Finance Banks, Payments banks, and Local Area Banks

Impact of SLR on Investors

The SLR requires that commercial banks invest a percentage of their net demand and time liabilities in liquid assets such as government securities. This directly impacts investors:

• Investment in Government Securities: Given that SLR mandates holding government bonds in the banks' books, this may be a sure demand for the securities, thus benefiting the investors.
• Reduced Investment Flexibility for Banks: The reserve requirement limits banks' flexibility to lend or invest in other high-yield assets. This may affect the overall returns the banks offer and impact the returns to the investors.
• Potential for Lower Returns on Bank Deposits: To comply with SLR, banks invest a portion of their funds in low-yield government securities, which may reduce depositors' returns on deposits and, therefore, affect investment choice.
• Market Liquidity and Yield Curve: If SLR increases, forcing banks to hold government securities may significantly negatively influence the yield curve and market liquidity. Long-term investors in government bonds would benefit from a stable SLR.

Impact of SLR on Base Rate

The base rate is the rate a commercial bank lends to its customers. The following are the effects of the SLR on the base rate:

• Cost of Funds to Banks: Banks must hold a higher portion of their assets in liquid cash forms, such as government bonds, which yield less income than other forms of investment.
• Credit Supply and Interest Rate: A high SLR limits the bank's lending capacity, hence the supply of credit available in the economy. Therefore, the banks' base rates may increase to check the loan demand and keep their profitability intact.
• Link with Inflation Control: Central banks manipulate SLR to control inflation. It is generally true that a higher SLR brings with it a higher base rate, and holding up operational costs, banks pass on this cost to consumers.

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