SLR | Full Form, Objectives, Components and Examples

The full form of SLR is Statutory Liquidity Ratio. SLR is defined as the minimum liquidity percentage that every bank has to maintain with them in order to discharge their liability as and when occurs. This liquidity can be maintained in the form of cash, gold, and other liquid assets. SLR is the amount that commercial banks need to maintain with themselves, not with the Reserve Bank of India (RBI).

What is the Statutory Liquidity Ratio (SLR)?

Statutory Liquidity Ratio (SLR) is defined as the minimum amount and/or percentage of cash, gold, or other liquid assets that every bank needs to maintain at the end of the day. Statutory Liquidity Ratio (SLR) is to be maintained by commercial banks with themselves. The banks must maintain such an amount to discharge their liabilities. Statutory Liquidity Ratio is determined as per the bank's liabilities, but in India, it is set up by the Reserve Bank of India (RBI). RBI has the control to change SLR at any time, and it can increase SLR up to 40%.

Key Components of Statutory Liquidity Ratio (SLR):

• SLR is the minimum amount that all commercial bank needs to maintain with themselves in order to meet their liabilities.
• SLR can be maintained in the form of cash, gold, or other liquid securities.

Objectives of Statutory Liquidity Ratio (SLR)

Statutory Liquidity Ratio being a major tool for monetary control has a wide range of objectives:

1. Control Money Supply: SLR creates a statutory obligation for banks to deposit a certain portion of their Net Time and Demand Liabilities, which creates a shortage of supply available with banks to overgo their business operations, which allows RBI to control inflation and excess money supply.

2. Protection of Commercial Banks: SLR makes sure that banks have enough liquidity available to themselves to make sure they can pay off customer dues and financial obligations on time. SLR also makes sure that banks do not experience over-liquidation.

3. Financial Stability: SLR makes sure that banks deposit their particular portion of holdings in safe, secure, and easily convertible securities. This helps banks to face any financial uncertainty or market distress.

4. Market to Government Securities: SLR has also helped the government to receive huge investments in government securities, as it has been observed that the majority of the time banks maintain these deposits in the form of government securities as it yields their interest income.

Components of Statutory Liquidity Ratio (SLR)

1. Net Time and Demand Liabilities (NTDL): When the customer deposits the money for a fixed period, the bank is bound to pay off the customer after the maturity of the fixed period. This is referred to as Time Liability. For example, Fixed deposits, KVPs, etc. Whereas when a customer deposits money that is repayable on demand of the customer such deposits are called Demand Liabilities. For example, Savings bank accounts, checking accounts, etc. Net Time and Demand Liabilities are the sum of time liabilities minus the sum of demand liabilities.

2. Liquid Assets: Assets that can be easily converted into cash are liquid assets. SLR can be maintained in cash deposits, government bonds, government-approved securities, treasury bills, and gold.

3. SLR Limit: The SLR limit is prescribed by the apex banking body; i.e., Reserve Bank of India. RBI has also prescribed a list of financial institutions that have to follow SLR requirements.

How Does Statutory Liquidity Ratio (SLR) Work?

Statutory Liquidity Ratio (SLR) is an important tool for tackling the money supply and credit control. As SLR requires banks to deposit their NTDL (Net of Time and Demand Liability) in government securities, this gives banks a restricted amount to continue their commercial operations and there will be a controlled infusion of money in the economy. In times of inflation, banks can increase the SLR percentage which will make banks keep more deposits with themselves and there will be a restricted money supply in the economy and decreased spending. Whereas, when there is a time of recession banks will reduce the rates of SLR, which will boost the credit infusion and increase spending.

SLR=\frac{Liquid~Assets}{(Net~Demand+Time~Liabilities)}\times100

Example:

The following figures are observed from the financials of a bank:

Liquid Assets = ₹60,00,000

NTDL = ₹3,00,00,000

SLR=\frac{Liquid~Assets}{(Net~Demand+Time~Liabilities)}\times100

SLR=\frac{60,00,000}{(₹3,00,00,000)}\times100

SLR = 20%

Impact of Statutory Liquidity Ratio (SLR)

1. Liquidity Management: SLR mandates that banks hold a certain percentage of their deposits in liquid assets like government securities. This ensures that banks have a ready source of funds to meet short-term liquidity needs.

2. Stability: SLR acts as a safety net for banks. It helps prevent bank runs and ensures that they have the means to honor depositors' withdrawals, enhancing overall financial stability.

3. Monetary Policy Tool: Central Banks can adjust SLR requirements to influence the money supply. Lowering SLR frees up funds for banks to lend potentially stimulating economic growth, while increasing SLR has the opposite effect, helping control inflation.

4. Interest Rates: SLR can indirectly affect interest rates. When SLR is high, banks may have less money available for lending, which can push up lending rates. Conversely, a lower SLR can lead to lower lending rates.

Difference between Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)

Conclusion

SLR is a crucial tool used by the apex financial body; i.e., RBI for the stability of banking and the economy. SLR requires banks to maintain minimum reserves in the form of Cash, Gold, or Government securities. However, Banks usually hold more than the prescribed rate of SLR, so that they can maintain their holding liquid assets. This helps banks to fulfill their customer's dues on demand. SLR helps to control the money supply and inflation and it is important to control both money supply and inflation, as they have an impact on the country's market as a whole. The primary aim of prescribing SLR is to make the banking industry ready to tackle any economic, and financial uncertainty and protect both the bank and its depositors.