What is SLR? A beginner’s guide to Statutory Liquidity Ratio

If you're new to banking or investing in India, you might have seen the term "SLR" often used in news articles about finance and the latest updates on Reserve Bank of India (RBI) policy. SLR or Statutory Liquidity Ratio is one of the important tools used by the RBI as it seeks to promote the health and stability of India's banking system. Understanding the SLR is important for bankers and for anyone who likes to understand the impact of monetary policy on lending rates, the availability of loans, and the economy.

What is SLR?

Statutory Liquidity Ratio is the minimum percentage of total deposits a bank must maintain in the form of liquid assets (e.g. cash, gold, and securities approved by the government) before a bank is permitted to provide credit. The SLR is set by the RBI and it is one of the control mechanisms to regulate money flow in the economy. As of May 2025, the SLR in India stands at 18% - meaning every bank must maintain 18% NDTL (Net Demand and Time Liabilities) in liquid form.

Why does SLR exist?

• Ensures bank solvency: By mandating that banks hold a certain portion of their deposits in safe, liquid assets, the SLR helps ensure that banks can meet withdrawal demands and remain solvent even during financial stress.

• Controls credit growth: By adjusting the SLR, the RBI can influence how much money banks have available to lend. A higher SLR means banks must keep more money in reserve, reducing funds available for loans, which can help control inflation. Conversely, lowering the SLR increases liquidity, encouraging more lending and economic growth.

• Supports government borrowing: Since banks must invest a portion of their deposits in government securities, the SLR helps the government raise funds for public projects and infrastructure by ensuring a steady demand for its bonds.

• Promotes financial discipline: The SLR ensures that banks maintain a buffer of liquid assets, reducing the risk of bank failures and maintaining public confidence in the banking system.

How is SLR calculated?

The SLR is calculated as a percentage of a bank’s Net Demand and Time Liabilities (NDTL). NDTL is the sum of all deposits held by a bank, including savings, current, and fixed deposits, minus deposits held by other banks. The formula is

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

• Liquid Assets: These include cash, gold (valued at current market price), and RBI-approved government securities such as treasury bills, dated government bonds, and state development loans.

• NDTL: This includes all demand (payable on demand, like savings and current accounts) and time liabilities (payable after a certain period, like fixed deposits).

Suppose a bank has Rs. 1,000 crore in NDTL and the SLR is set at 18%. The bank must maintain Rs. 180 crore in liquid assets (cash, gold, or government securities) to comply with the SLR requirement.

How does SLR work in practice?

Banks must calculate and report their SLR status to the RBI regularly. If a bank fails to maintain the prescribed SLR, it faces penalties. Such penalties ensure that banks adhere to the reserve requirements, maintaining overall financial discipline.

The SLR directly impacts how much money banks can lend. For example, if the RBI increases the SLR, banks have less money to lend, which can slow down economic activity and help control inflation. If the SLR is reduced, banks have more funds to lend, which can stimulate growth but may also risk higher inflation if not managed carefully.

SLR vs CRR: What’s the difference?

• CRR: Cash Reserve Ratio is the percentage of deposits that banks must keep as cash with the RBI. Banks earn no interest on this reserve.

• SLR: The percentage of deposits that banks must maintain in liquid assets (cash, gold, government securities) in their own vaults. Banks can earn interest on government securities held as SLR.

Impact of SLR on the economy

• Interest Rates: Higher SLR can lead to higher lending rates, as banks have less money to lend and may need to charge more to maintain profitability.

• Loan Availability: When the SLR is high, banks may tighten lending, making it harder for individuals and businesses to get loans.

• Inflation Control: By restricting or increasing the money supply, SLR helps the RBI manage inflation and maintain price stability.

• Government Funding: It ensures a steady demand for government securities, helping the government raise funds for development projects.

Who must maintain SLR?

Several regulated businesses in India are also subject to the SLR as part of an abbreviated regulatory regime. Scheduled commercial banks, local area banks, state and central co-operative banks, and primary (urban) co-operative banks must maintain the SLR required under Section 24 of the Banking Regulation Act, 1949. Non-Banking Financial Companies (NBFCs) are not subject to the SLR but must comply with other prudential norms.

Conclusion

SLR is not just a technical banking term, it is one of the most important parts of India's financial stability. It protects depositors, stabilises government financing and gives RBI another powerful tool to influence economic performance. Whether you borrow, save or invest, understanding how the SLR works can help everyone improve financial decisions and allow them to consider how the economic environment may change.