Statutory Liquidity Ratio

Also called: SLR · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"; Class 12, Ch 5 "Government Budget and the Economy"

Meaning

The Statutory Liquidity Ratio (SLR) is the share of a bank's Net Demand and Time Liabilities (NDTL) that the bank must keep with itself as liquid assets. Liquid assets are things that can quickly be turned into cash: cash, gold and unencumbered government securities [4].

• Formula: SLR amount = SLR (%) × NDTL
• Why it matters (1): it keeps some safe, liquid assets in every bank, so the bank can pay depositors.
• Why it matters (2): banks must hold government bonds, so the SLR gives the government a fixed group of buyers for its bonds. This is how the government borrows indirectly from commercial banks.

Explanation

How it works

• The base is NDTL, not total deposits.
• Demand liabilities are money a bank must pay whenever the customer asks, e.g. savings and current account deposits.
• Time liabilities are money a bank must pay only after a fixed period, e.g. fixed deposits.

• NDTL = (Demand liabilities + Time liabilities) − assets held with other banks (interbank assets).

• The bank keeps the SLR assets itself. It does not send them to the RBI. This is the key difference from CRR.

• Legal basis: the SLR comes from Section 24 of the Banking Regulation Act, and the RBI sets the level.

What counts as SLR assets

• Cash
• Gold
• Unencumbered government securities (G-secs):
• G-secs are bonds issued by the government to borrow money.

• "Unencumbered" means the bond is not already pledged as security for another loan. A pledged bond cannot be sold quickly, so it does not count.

• In practice most SLR money is held in G-secs, because G-secs pay interest and cash and gold do not.

Worked example (₹ crore)

• Demand liabilities 600 + time liabilities 400 = 1,000.
• Minus interbank assets of 50 → NDTL = 950.
• SLR at 18%: 950 × 0.18 = ₹171 crore kept as SLR assets.
• CRR at 3%: 950 × 0.03 = ₹28.5 crore kept with the RBI.
• Left for lending: 950 − 171 − 28.5 = ₹750.5 crore.

What a change in SLR does

• SLR cut (expansionary):
• Banks need to lock up less money in G-secs.
• More funds are free for loans.

• Credit and money supply rise.

• SLR raise (contractionary):

• More bank money is locked up in liquid assets.
• Less is left to lend to people and firms.

• Credit and money supply fall.

• Like CRR and the repo rate, the SLR is a quantitative tool. It changes the total amount of credit in the whole economy and does not target any one sector.

In India

• Who manages it: the Reserve Bank of India (RBI), set up in 1935, fixes the SLR under Banking Regulation Act s.24.
• Current level: 18% of NDTL (check the latest RBI circular before the exam).
• Peak: 38.5% in 1990. At that level more than a third of bank funds went into government-approved assets.
• Cut over time: bringing the SLR down from 38.5% (1990) to 18% was a key part of banking reform. It freed bank money for private lending.
• Link to the Budget: the government pays for its fiscal deficit (the gap between what it spends and what it earns) partly by selling G-secs. The SLR makes sure banks are always ready buyers of these bonds. This is the "captive channel" of government borrowing.
• Where it sits among RBI tools: the SLR works next to CRR (3% of NDTL from 29 November 2025) [3] and the repo rate (5.25%, August 2026) [2].

Don't confuse with

• Cash Reserve Ratio (CRR): CRR comes from RBI Act s.42 and is kept with the RBI as cash that earns no interest. SLR comes from Banking Regulation Act s.24 and is kept by the bank itself, mostly in G-secs that earn interest.
• Open Market Operations (OMO): in an OMO the RBI chooses to buy or sell G-secs to add or remove liquidity. Under the SLR, banks are legally required to hold G-secs. One is a market action, the other is a legal ratio.
• Repo rate: the repo rate is the price of short-term RBI loans to banks. The SLR is a quantity rule on how much of its NDTL a bank must keep liquid.
• Total deposits: the SLR is calculated on NDTL, not on total deposits. NDTL subtracts interbank assets.

Prelims Hooks

• SLR = share of NDTL kept by the bank itself in cash, gold or unencumbered G-secs [4].
• Legal source: Banking Regulation Act s.24. CRR is under RBI Act s.42. Swapping the two Acts is a common trap.
• Current SLR: 18%. Peak: 38.5% in 1990.
• G-secs already pledged as security for a loan do not count towards the SLR. Only unencumbered ones count.
• SLR cut → more lendable funds → money supply rises.
• Both CRR and SLR are calculated on NDTL. Example: NDTL ₹950 crore × 18% = ₹171 crore.

Mains Points

• Captive government borrowing vs private credit:
• The SLR gives the government sure buyers for its bonds, so it can borrow more cheaply.
• But it locks up bank money that could have been lent to private firms. This is a form of financial repression (rules that push savings towards the government at low cost).

• Use this in GS-III answers on fiscal deficit, crowding out and credit to MSMEs.

• Banking reform: the cut from 38.5% (1990) to 18% gave banks more freedom to lend on commercial terms. It is a good example of how financial-sector reform supported growth after liberalisation.

• Safety buffer vs lending: a high SLR makes banks safer, because they hold assets they can quickly sell for cash. But it lowers their lending and profits. Policymakers must balance bank stability, cheap government borrowing and credit for growth. This links to the RBI's legal goal of price stability "while keeping in mind the objective of growth" [4].

Related concepts

• Monetary policy
• Expansionary monetary policy
• Contractionary monetary policy
• Quantitative tools of monetary policy
• Cash Reserve Ratio
• Net Demand and Time Liabilities
• Bank rate
• Open market operations
• Outright open market operations
• Repo rate

Read more

• Monetary policy and its quantitative instruments