What is Statutory Liquidity Ratio (SLR)?

Know what SLR stands for and why you need to know about it to understand banks and the involved monetary aspects

Every country has a monetary authority in charge of overseeing the operation of banks. The Reserve Bank of India (RBI) is India's principal monetary regulator operating at a national level.

The RBI's mission is to maintain price stability throughout the country. Its principal task is to devise and implement monetary policy, which aids in managing the flow and supply of money in the economy to achieve growth. The RBI accomplishes this by keeping track of and controlling interest rates.

Credit ceiling, statutory liquidity ratio, cash reserve ratio, bank rate policy, open market operations, credit authorisation system, repo rate, reverse repo rate, moral suasion, and other monetary policy instruments are used by the RBI. These devices are critical in managing and regulating the flow of money in the economy of a country. For this article, we will be focusing on the statutory liquidity ratio or SLR. 

What is the meaning of statutory liquidity ratio (SLR)?

The statutory liquidity ratio (SLR) is used in the Indian banking system to describe the minimum reserve requirement that commercial banks must meet. The term 'statutory' denotes that it is mandated by law. According to the Reserve Bank of India (RBI) Act, every commercial bank in India is required to retain a specified amount of time and demand deposits as liquid funds in its vault.

In the context of the statutory liquidity ratio, these assets can include gold, cash, Indian government-approved securities, and so on. The statutory liquidity ratio also includes securities sanctioned under market stabilisation schemes (MSS), treasury bills, and market borrowing programmes. Every bank is required to maintain SLR since it aids in the expansion of bank credit.

What is the purpose of a statutory liquidity ratio (SLR)?

The goals of the monetary policy, of which the SLR is a part, are:

• To keep prices steady for aiding successful economic development.
• To grow bank credit and monetary supply in a way that does not impair any bank's output. This also ensures that all banks can meet seasonal credit requests.
• To keep money and inventory under control. Unlimited money and inventory stocking results in obsolete stock, which results in the formation of ill units. The RBI demands that no bank has idle cash to prevent it from becoming a sick institution.
• To make banks more flexible through its monetary policy to encourage variety, idea creation, and independence among bank personnel, and a welcoming environment for consumers and staff. Only when necessary does the central monetary institution intervene in the functioning of any bank.
• To increase the output and performance of banks' fixed investments. This is accomplished by limiting fixed investments that aren't required by a bank.

The importance of the statutory liquidity ratio

Every bank should have a portion of its Net Demand and Time Liabilities (NDTL) in cash, gold, or other liquid securities. The Statutory Liquidity Ratio (SLR) is the proportion of these liquid securities that a bank must maintain. The Reserve Bank of India (RBI) can raise this percentage by up to 40%.

The bank's ability to infuse money into the economy is hampered when the ratio rises. The Reserve Bank of India (RBI) is also in charge of regulating the flow of funds and maintaining price stability in the Indian economy. SLR is crucial in ensuring bank viability and cash flow in the economy, among other things.

The Reserve Bank of India's underlying premise for establishing the Statutory Liquidity Ratio (SLR) is caution. It is critical to exercise caution and foresight when engaging in any financial transaction. All banks operate under the same basic principle: accept public deposits and then guarantee to provide customers with assets at par or higher.

This is, however, a risky operation for any bank. The Reserve Bank of India requires that each bank invests at least a modest portion of its funds with it to limit its risk and minimise its risk rate. This ensures that they protect their funds in the control of the most secure institution in the shape of the most secured assets.

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