Statutory Liquidity Ratio

What is the Full Form of SLR?

The full form of SLR is "Statutory Liquidity Ratio." It is the percentage of deposits that commercial banks are required to maintain in the form of liquid assets, such as cash, gold, or government securities. The SLR is used as a tool to control the money supply in the economy and to ensure that banks have sufficient funds to meet the demands of their depositors.

Purpose of Statutory Liquidity Ratio
The purpose of Statutory Liquidity Ratio (SLR) is to ensure that commercial banks maintain a certain percentage of their deposits in the form of liquid assets, such as cash or government securities.
The main objective of SLR is to provide a buffer to commercial banks against any potential run on the bank and to ensure the stability and soundness of the banking system.
SLR also acts as a monetary policy tool that helps the central bank control the money supply and inflation in the economy.
By requiring banks to maintain a certain level of liquid assets, SLR also helps to ensure that banks have the ability to meet their obligations to depositors and other creditors in times of stress.
SLR also helps to ensure that banks have sufficient funds to meet their statutory and regulatory obligations, such as maintaining cash reserves and providing credit to priority sectors.
The Reserve Bank of India (RBI) sets the SLR rate, which varies depending on economic conditions and the overall health of the banking system.
SLR is typically reviewed and adjusted by the central bank on a regular basis in order to ensure that it remains an effective tool for maintaining the stability and soundness of the banking system.
How to calculate the Statutory Liquidity Ratio
The formula for calculating SLR is:

SLR = (Cash Reserve Ratio + Statutory Liquidity Ratio) / Net Demand and Time Liabilities (NDTL)

Where,

Cash Reserve Ratio (CRR) = a percentage of deposits that a bank is required to hold as cash

Statutory Liquidity Ratio (SLR) = a percentage of deposits that a bank is required to hold in the form of liquid assets

Net Demand and Time Liabilities (NDTL) = the sum of all liabilities that are payable on demand or within a notice period of 14 days or less.

For example, if a bank has deposits of Rs.100 million and the SLR is 18%, the bank must hold liquid assets of at least Rs.18 million.

Types of Securities in Statutory Liquidity Ratio
Statutory Liquidity Ratio (SLR) is a percentage of deposits that banks are required to maintain in the form of liquid assets, such as cash, gold, or approved securities. The types of securities that can be included in SLR are government securities, treasury bills, and other approved securities issued by government-owned entities. These securities are considered highly liquid and safe investments, which is why they are accepted as a part of SLR.

In what form securities of Statutory Liquidity Ratio are maintained?
Securities for the Statutory Liquidity Ratio (SLR) are maintained in the form of government securities, Treasury bills and other approved securities. These securities are held in physical form or in the form of dematerialized form in the books of the Reserve Bank of India. The SLR is a percentage of deposits that banks are required to maintain in the form of liquid assets such as cash, gold or approved securities. The SLR is set and maintained by the Reserve Bank of India to ensure that banks have sufficient liquid assets to meet the cash withdrawal and other demands of depositors.

Uses of Statutory Liquidity Ratio
SLR is used as a tool to control the credit creation by banks.
It helps in maintaining the liquidity of the banks.
SLR is used to ensure that banks hold a certain percentage of their deposits in liquid assets such as cash, gold, and government securities.
It acts as a buffer for banks during times of economic stress or financial crisis.
SLR is used to control inflation by limiting the amount of credit available in the economy.
It helps in maintaining the stability of the financial system by ensuring that banks have sufficient liquid assets to meet the withdrawal demands of depositors.
SLR is used to regulate the flow of credit to different sectors of the economy.
It helps in maintaining the integrity and safety of the banking system by ensuring that banks maintain adequate levels of liquidity.
SLR is used to promote the development of the money market.
It is also used to manage the external value of the currency by influencing the demand for foreign exchange.
Impact of Statutory Liquidity Ratio
The impact of SLR on banks is that it reduces their lending capacity as they have to hold a portion of their deposits in liquid assets. This can also increase the cost of borrowing for customers as banks may charge higher interest rates to compensate for the reduced lending capacity. Additionally, it can also impact the overall economic growth by constraining the money supply and limiting the ability of banks to finance new projects.

Merits of Statutory Liquidity Ratio
Some of the benefits of SLR include:

Maintaining financial stability: By requiring banks to hold a certain percentage of their deposits in liquid assets, SLR helps to ensure that banks have enough cash on hand to meet the demands of their depositors, even in times of economic stress.
Controlling inflation: By limiting the amount of money that banks can lend out, SLR can help to curb inflation by slowing down the rate of money supply growth.
Supporting monetary policy: SLR can be used as a tool by central banks to achieve their monetary policy objectives, such as controlling interest rates or managing currency exchange rates.
Promoting credit discipline: SLR also helps to ensure that banks have a certain minimum level of liquidity and credit discipline. As banks are required to maintain a certain percentage of their deposits in liquid assets, they are less likely to engage in risky lending practices.
Demerits of Statutory Liquidity Ratio
Statutory Liquidity Ratio (SLR) also has some drawbacks, including:

Reduced lending capacity: By requiring banks to hold a certain percentage of their deposits in liquid assets, SLR reduces the amount of money that banks can lend out, which can limit their ability to support economic growth and job creation.
Reduced profitability: Holding a large amount of liquid assets, such as government bonds, can be less profitable for banks than lending the money out to borrowers. This can reduce the profitability of banks and make it more difficult for them to attract capital.
Inefficiency: SLR may create inefficiency in the banking system as banks are forced to hold liquid assets which may not be in line with the banks' overall strategy or business model.
Inadequate liquidity: Because SLR is a fixed percentage, it may not be sufficient to meet the actual liquidity needs of banks during times of economic stress.
Inflexibility: Because SLR is a fixed percentage, it does not take into account the specifi