In the Indian banking system, the Reserve Bank of India (RBI) uses several tools to regulate the flow of money, control inflation, and ensure financial stability. Among these, the Statutory Liquidity Ratio (SLR) is one of the most important instruments. It not only controls how much money banks can lend but also ensures that they maintain financial discipline. For banking exam aspirants preparing for SBI PO, NABARD, RBI Grade B, IBPS, or LIC AAO Exams, understanding SLR is crucial, as questions on monetary policy tools frequently appear in both prelims and mains.
What is Statutory Liquidity Ratio (SLR)?
The Statutory Liquidity Ratio (SLR) is the minimum percentage of a commercial bank’s Net Demand and Time Liabilities (NDTL) that must be kept in the form of liquid assets such as cash, gold, or approved government securities before providing loans.
This requirement is mandated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949. In simple words, SLR is the portion of deposits that banks cannot use freely for lending because it has to be invested in safe and secure assets.
Why is SLR Important for Bank Exam Aspirants?
For competitive exams like SBI PO, RBI Grade B, IBPS PO, NABARD, and LIC AAO, knowledge of monetary policy tools such as SLR and CRR is essential. Questions are often framed around such important Banking Awareness Terms:
- The definition and formula of SLR
- The difference between CRR and SLR
- The impact of SLR changes on inflation, lending, and growth
- The current rate of SLR as fixed by RBI
SLR Formula
Before lending money, banks must calculate the portion of deposits that should be kept aside as SLR. The formula is:
SLR = (Liquid Assets / Net Demand and Time Liabilities) x 100
Here:
- Liquid assets are cash, gold, and RBI-approved government securities
- NDTL are Net Demand and Time Liabilities (savings deposits + current deposits + fixed deposits, etc.)
Example: If a bank’s NDTL is ₹1000 crore and SLR is 18%, the bank must maintain ₹180 crore in the form of cash, gold, or approved securities.
Functions of Statutory Liquidity Ratio (SLR)
SLR plays a crucial role in regulating the Indian financial system. Its major functions include:
- Credit Regulation – Controls the flow of credit by increasing or decreasing banks’ lending power.
- Inflation Control – Helps RBI curb inflation by restricting lending when SLR is raised.
- Financial Stability – Ensures banks maintain a strong financial base by holding liquid assets.
- Government Funding – Provides regular funding to the government as banks invest in securities.
- Monetary Policy Support – Assists RBI in implementing monetary policies effectively.
Advantages of SLR
SLR is not just a regulatory requirement; it also benefits banks, the government, and the economy. Some of its key advantages are:
- Ensures Liquidity – Keeps banks liquid and ready to meet customer demands.
- Builds Depositor Trust – Strengthens customer confidence by ensuring a portion of deposits is safely invested.
- Supports Government Projects – Helps government raise funds through securities.
- Reduces Risks – Prevents banks from reckless lending.
- Strengthens Monetary Policy – Acts as a buffer against inflation and deflation.
Effects of SLR on Banks, Borrowers, and the Economy
The impact of SLR depends on whether RBI increases or decreases the ratio. Banks, depositors, and the economy are affected in the following ways:
| Aspect | When SLR is Increased | When SLR is Decreased |
| Bank Lending | Lending power decreases | Lending power increases |
| Interest Rates | Loan rates rise due to liquidity crunch | Loan rates may fall due to surplus funds |
| Inflation | Controls inflation by reducing money supply | May increase inflation if credit grows too fast |
| Economic Growth | Growth slows due to limited credit | Growth accelerates due to higher lending |
| Government Funding | Banks invest more in securities | Banks have more flexibility to lend |
Difference Between SLR and CRR
Both SLR and Cash Reserve Ratio (CRR) are important monetary policy tools, but they differ in nature and purpose.
| Feature | SLR | CRR |
| Form of Reserve | Cash, gold, approved securities | Only cash with RBI |
| Returns | Earns interest on securities | No interest paid |
| Impact on Liquidity | Indirect impact | Direct impact |
| Purpose | Credit regulation + govt. borrowing support | Liquidity & inflation control |
Current SLR Rate in India
As per the latest RBI guidelines, the minimum SLR prescribed is 18% of NDTL. RBI reviews the rate periodically during its Monetary Policy Committee (MPC) meetings.
Exam Tip: Remember that SLR cannot be lower than 18% as per RBI rules.
Important Questions on SLR for Banking Exams
- What is the full form of SLR in banking?
- Under which act is SLR governed in India?
- What is the formula to calculate SLR?
- What is included in liquid assets for SLR?
- What is the minimum SLR prescribed by RBI?
- Does SLR earn returns for banks?
- What is the difference between CRR and SLR?
- How does an increase in SLR affect inflation?
- How does a decrease in SLR affect bank lending?
- What was the highest ever SLR in India’s history?
- Which authority decides the SLR rate in India?
- Why is SLR important for depositors?
- Can SLR be maintained in gold?
- How does SLR support government borrowing?
- Why is SLR important for banking exams like SBI PO, RBI Grade B, and LIC AAO?
FAQs
SLR is the minimum percentage of NDTL that banks must keep in liquid assets like cash, gold, or approved securities before offering loans.
CRR is kept in cash with RBI and earns no returns, whereas SLR can be held in securities, gold, or cash and earns interest.
RBI changes SLR to control inflation, regulate lending capacity, and ensure financial stability.
The current minimum SLR rate is 18% of NDTL.
A high SLR reduces lending and controls inflation, while a low SLR increases lending but may cause inflation.
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