Statutory Liquidity Ratio (SLR)

Statutory Liquidity Ratio (SLR) is the percentage of the Net Demand and Time Liabilities, a Scheduled Commercial bank (SCB) is required to maintain in liquid assets. RBI is empowered to stipulate SLR up to 40%. SLR is stipulated under Section 24 (2) (B) of B.R. Act, 1949.

Purpose of stipulation of SLR

Statutory Liquidity Ratio is prescribed to ensure twin objectives; a. maintenance of liquidity and solvency of banks and b. regulate liquidity in market. Banks are permitted to maintain SLR as liquid assets in the form of cash, gold and unencumbered approved securities. The ratio of liquid assets to the Net demand and time Liability represents the level of SLR.

RBI utilizes Statutory Liquidity Ratio, along with Cash Reserve Ratio (CRR) to maintain liquidity in market and to control inflation. An increase in SLR, restricts the lending power of banks. For example, with a CRR of 4% and SLR of 20%, for every Rs. 100 mobilsed as deposit, the bank will be required to maintain Rs. 4 as CRR and Rs. 20 in the form of any of the permitted liquid asset as SLR. Hence, in effect, the bank will be left with just Rs. 76 to lend in the market.

Demand and Time Liabilities For calculation of Statutory Liquidity Ratio(SLR)

Demand Liabilities are those liabilities which are payable on demand and Time Liabilities are those which are payable otherwise than on demand. The components of DTL include Demand Liabilities (DL), Time Liabilities (TL) and Other Demand & Time Liabilities (ODTL).

Please refer article Demand and Time Liabilities (DTL) & Net Demand and Time Liabilities (NDTL) for the full list of items coming under Demand Liabilities (DL), Time Liabilities (TL) and Other Demand & Time Liabilities (ODTL). Article Cash Reserve Ratio (CRR) mentions the list of liabilities that can be excluded and exempted while arriving at NDTL. The procedure to compute total NDTL for the purpose of SLR is broadly similar to the procedure followed for CRR.

Marginal Standing Facility (MSF)

Marginal Standing Facility (MSF) is a scheme introduced by Reserve Bank to enable SCBs to borrow up to 2% of their NDTL outstanding at the end of the second preceding fortnight. Similarly, SCBs can access overnight facilities against their liquid asset holding in excess of SLR requirement.

Within the mandatory SLR requirement, Government securities to the extent allowed by the RBI under Marginal Standing Facility (MSF) are permitted to be reckoned as the Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing Liquidity Coverage Ratio (LCR) of banks. In addition to this, banks are permitted to reckon up to another 5 per cent of their NDTL within the mandatory SLR requirement as level 1 HQLA. This is the Facility to Avail Liquidity for Liquidity Coverage Ratio that was notified vide DBR.BP.BC.No.52/21.04.098/2014-15.

Liquid assets permitted under Statutory Liquidity Ratio (SLR)

SCBs are required to maintain SLR as (a) Cash or (b) in Gold valued at a price not exceeding the current market price, or (c) Investment in the following instruments which are known as  “Statutory Liquidity Ratio (SLR) securities”:
(i) Dated securities issued up to May 06, 2011 as listed in the Annex to Notification DBOD.No.Ret.91/12.02.001/2010-11 dated May 09, 2011;
(ii) Treasury Bills of the Government of India;
(iii) Dated securities of the Government of India issued from time to time under the market borrowing programme and the Market Stabilization Scheme; (Market borrowing programme  means domestic rupee loans raised through an auction or any other method, by Government Of India and State Governments from the public and managed by the RBI)
(iv) State Development Loans (SDLs) of the State Governments issued from time to time under the market borrowing programme; and
(v) Any other instrument as may be notified by the Reserve Bank of India.
Provided that the securities (including margin) referred to above, if acquired under the Reserve Bank- Liquidity Adjustment Facility (LAF), shall not be treated as an eligible asset for this purpose.

Any balance maintained by a scheduled bank with RBI in excess of CRR and net balance in current accounts with other SCBs in India will be considered as Cash. Encumbered SLR securities shall not be reckoned for the purpose of arriving availability of SLR. However, securities offered as collateral to RBI for borrowing under Marginal Standing Facility (MSF) can be considered towards SLR.

Procedure and maintenance of SLR

All SCBs are required to submit to RBI before 20th of every month a return (For VIII) showing the amount of SLR held on alternate Fridays during immediate preceding month with particulars of their DTL in India on such Fridays (If reporting Friday is a public holidays preceding working day).
Banks should also submit a statement as Annexure to Form VIII Return giving daily position of (a) assets held for the purpose of compliance with SLR, (b) excess cash balances maintained by them with RBI in the prescribed format, and (c) mode of valuation of securities.
The Statutory Auditors should verify and certify correctness of outside liabilities.

Penalty for non-maintenance of Statutory Liquidity Ratio

Default in maintenance of SLR requirement by SCBs attracts penal interest for that day at 3% above Bank Rate on the short fall. In case the shortfall continues on the next succeeding day/s, penal interest at the rate of 5% p.a. above the Bank Rate is applicable.