SLR
The Statutory Liquidity Ratio (SLR) is the minimum percentage of a bank's net demand and time liabilities that must be maintained in approved liquid assets — primarily government securities, cash, and gold — as mandated by the Reserve Bank of India.
The Statutory Liquidity Ratio serves a dual purpose in India's banking framework: it ensures that banks hold a buffer of liquid assets to meet sudden outflows, and it creates a captive market for government debt by requiring banks to hold a prescribed share of their liabilities in government securities (G-Secs). This sovereign demand has historically helped the government finance its fiscal deficit at relatively lower yields.
Approved SLR assets include cash in hand, gold valued at current market prices, and unencumbered approved securities — predominantly central and state government bonds. Under the revised framework, investments in the held-to-maturity (HTM) category of the trading book are typically SLR-eligible. Banks must maintain the required SLR at the close of each business day, calculated as a percentage of NDTL as on the last Friday of the preceding fortnight.
The RBI progressively reduced the SLR from 38.5% in 1991 to 18% by 2018 and further to a floor of around 18% thereafter, as part of financial sector reforms aimed at freeing up more resources for private credit creation. Despite the reduction, SLR holdings often exceeded the statutory minimum because government bonds offered a risk-free yield attractive relative to the credit risk in commercial lending, especially during periods of economic stress.
For bank analysts, the SLR has implications for investment book composition and interest rate risk. Banks holding large SLR portfolios in the available-for-sale (AFS) category face mark-to-market losses when bond yields rise. The RBI's HTM dispensation — allowing a higher fraction of bonds to bypass mark-to-market — was periodically extended to limit the impact of rate volatility on bank balance sheets.
Investors comparing CRR and SLR often conflate them, but there is a critical distinction: CRR earns no interest and must be held as cash at the RBI, while SLR securities earn coupon income and can be held at the bank's own treasury. This makes SLR a less punitive requirement in terms of income forgone, though the large size of mandatory G-Sec holdings still concentrates interest-rate risk on bank balance sheets.