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Statutory Liquidity Ratio (SLR)

Introduction

Statutory Liquidity Ratio (SLR) is an important banking regulation tool that ensures banks always maintain a minimum level of safe and liquid assets.

SLR questions are frequently asked in exams in comparison with Cash Reserve Ratio (CRR) and usually test conceptual clarity.

Pattern: Statutory Liquidity Ratio (SLR)

Pattern

Statutory Liquidity Ratio is the percentage of a bank’s total deposits that must be maintained in the form of liquid assets such as cash, gold, or approved government securities.

Step-by-Step Example

Question

What happens when the Statutory Liquidity Ratio (SLR) is increased by RBI?

Options:

  • A. Banks can lend more money
  • B. Liquidity in the economy increases
  • C. Banks must hold more funds in liquid assets
  • D. Banks earn more interest on deposits

Solution

  1. Step 1: Understand what SLR represents

    SLR is the portion of deposits banks must keep in safe, liquid assets.

  2. Step 2: Analyse the effect of SLR increase

    Higher SLR means banks must allocate more money to liquid assets.

  3. Step 3: Link SLR with lending capacity

    With more funds locked in liquid assets, banks have less money to lend.

  4. Final Answer:

    Banks must hold more funds in liquid assets → Option C

  5. Quick Check:

    SLR ↑ → Funds in liquid assets ↑ → Lending ↓ ✅

Quick Variations

• SLR is maintained by banks themselves, not with RBI.

• SLR assets include cash, gold, and government securities.

• Increase in SLR reduces banks’ lending capacity.

Trick to Always Use

  • Step 1 → SLR = liquid assets held by banks
  • Step 2 → SLR ↑ = funds locked in safe assets
  • Step 3 → SLR ↓ = more money available for lending

Summary

Summary

  • Statutory Liquidity Ratio is the percentage of deposits kept as liquid assets.
  • SLR is maintained by banks in cash, gold, or government securities.
  • Higher SLR reduces banks’ lending capacity.
  • SLR helps ensure banking system safety and stability.

Example to remember:
More liquid assets held by banks → Less money to lend → SLR

Practice

(1/5)
1. Statutory Liquidity Ratio (SLR) requires banks to maintain a portion of deposits mainly in:
easy
A. Cash, gold, and approved government securities
B. Only cash with RBI
C. Fixed deposits with RBI
D. Equity shares and debentures

Solution

  1. Step 1: Recall the meaning of SLR

    SLR refers to liquid and safe assets held by banks.

  2. Step 2: Identify eligible assets

    These include cash, gold, and approved government securities.

  3. Final Answer:

    Cash, gold, and approved government securities → Option A

  4. Quick Check:

    Safe + liquid assets = SLR ✅
Hint: SLR always means liquid assets with banks.
Common Mistakes: Confusing SLR with CRR cash kept with RBI.
2. Unlike CRR, Statutory Liquidity Ratio (SLR) is maintained:
easy
A. With the Reserve Bank of India
B. By banks themselves
C. By the Ministry of Finance
D. With public sector banks only

Solution

  1. Step 1: Compare CRR and SLR

    CRR is kept with RBI, while SLR is not.

  2. Step 2: Identify where SLR is maintained

    Banks themselves hold SLR assets.

  3. Final Answer:

    By banks themselves → Option B

  4. Quick Check:

    Assets with banks = SLR ✅
Hint: CRR with RBI, SLR with banks.
Common Mistakes: Assuming both CRR and SLR are kept with RBI.
3. Which of the following is the primary purpose of maintaining Statutory Liquidity Ratio?
easy
A. To maximise bank profits
B. To control foreign exchange rates
C. To ensure banks have sufficient liquid assets
D. To promote inter-bank lending

Solution

  1. Step 1: Identify why SLR exists

    SLR is a safety and stability measure.

  2. Step 2: Link SLR with liquidity

    It ensures banks can meet obligations using liquid assets.

  3. Final Answer:

    To ensure banks have sufficient liquid assets → Option C

  4. Quick Check:

    Safety buffer for banks = SLR ✅
Hint: SLR = liquidity safety net.
Common Mistakes: Linking SLR directly with profit objectives.
4. Which of the following assets is NOT considered for Statutory Liquidity Ratio?
medium
A. Gold
B. Government securities
C. Cash balance
D. Corporate equity shares

Solution

  1. Step 1: Recall eligible SLR assets

    SLR includes safe and liquid instruments.

  2. Step 2: Identify the risky asset

    Corporate equity shares are market-risk instruments.

  3. Final Answer:

    Corporate equity shares → Option D

  4. Quick Check:

    Risky assets ≠ SLR ❌
Hint: SLR excludes risky market instruments.
Common Mistakes: Including shares as SLR assets.
5. If RBI reduces the Statutory Liquidity Ratio, what is the most likely impact?
medium
A. Banks get more funds available for lending
B. Banks must hold more liquid assets
C. Liquidity in the economy decreases
D. CRR automatically increases

Solution

  1. Step 1: Understand SLR reduction

    Lower SLR frees funds locked in liquid assets.

  2. Step 2: Link free funds with lending

    Banks can use released funds for loans.

  3. Final Answer:

    Banks get more funds available for lending → Option A

  4. Quick Check:

    SLR ↓ → Lending capacity ↑ ✅
Hint: SLR cut = more lending power.
Common Mistakes: Assuming SLR cut reduces liquidity.

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