The Statutory Liquidity Ratio (SLR) is the proportion of a commercial bank's Net Demand and Time Liabilities (NDTL) that it is statutorily required to hold in liquid, low-risk assets — cash, gold, or government and other approved securities — before it can extend credit to customers. Its legal basis lies in Section 24 of the Banking Regulation Act, 1949, read with Section 56, which empowers the Reserve Bank of India to prescribe the ratio. The Act originally capped SLR at 40% and fixed a statutory floor, but the Banking Regulation (Amendment) Act, 2007 removed the 25% floor and the upper ceiling, leaving the RBI free to fix the rate. SLR is distinct from the Cash Reserve Ratio (CRR) under Section 42 of the RBI Act, 1934: CRR must be held only as cash with the RBI and earns no interest, whereas SLR is held by the bank itself, largely in interest-bearing G-secs.
Mechanically, SLR is a quantitative instrument of monetary policy and a tool of prudential regulation. By raising the ratio, the RBI compels banks to lock more funds in liquid assets, shrinking the funds available for lending and thus tightening credit; lowering it releases lendable resources. SLR also indirectly creates captive demand for government securities, supporting the sovereign's borrowing programme. Eligible SLR securities are notified by the RBI and valued at market prices. Importantly, SLR holdings interact with the Basel III Liquidity Coverage Ratio (LCR) — banks are permitted to reckon a portion of their SLR securities as High Quality Liquid Assets through the Facility to Avail Liquidity for LCR (FALLCR) and the Marginal Standing Facility, blending statutory and prudential liquidity requirements.
Historically SLR stood as high as 38.5% in the early 1990s, reflecting financial repression that channelled bank funds to the government. Post-liberalisation, the Narasimham Committee recommended phased reduction, and the ratio was progressively cut. As of 2026 the SLR is 18% of NDTL, having been trimmed in steps from 21.5% — the RBI reduced it by 25 basis points each quarter through 2017–2019 to align it with the LCR. The CRR for comparison was cut to 4% and further to 3% during the COVID-19 period before restoration; both ratios are announced through the bi-monthly Monetary Policy Statement of the RBI's Monetary Policy Committee. Non-maintenance of SLR attracts penal interest on the shortfall under Section 24(4).
For the UPSC examination, SLR is a high-frequency topic in Prelims (General Studies Paper I) under "Indian Economy — monetary policy and banking" and recurs in Mains GS Paper III. The classic prelims trap is to distinguish SLR from CRR — testing whether candidates know that SLR can be held in gold and securities (not just cash), is held by the bank rather than the RBI, and earns returns. Aspirants must also recall the governing statute (Banking Regulation Act, Section 24, versus RBI Act, Section 42 for CRR) and the direction of effect on credit and money supply. Mains questions typically ask candidates to evaluate quantitative versus qualitative instruments of monetary policy, where SLR features alongside CRR, repo rate, and open market operations.
Example
In December 2019 the Reserve Bank of India completed its phased reduction of the Statutory Liquidity Ratio to 18% of net demand and time liabilities, aligning it with Basel III liquidity coverage requirements.
Frequently asked questions
SLR is held by the bank itself in cash, gold, or approved securities under Section 24 of the Banking Regulation Act, 1949, and largely earns interest. CRR, under Section 42 of the RBI Act, 1934, must be held as cash with the RBI and earns no return.