Every country’s central bank is responsible for keeping an eye on inflation and enforcing certain controls on money circulation in the industry.
The CRR and SLR are key economic strategies for managing inflation and money flow in the country. Through these, the RBI manages bank lending capacity.
Key Takeaways
- CRR (Cash Reserve Ratio) is the percentage of a bank’s total deposits to be held in cash with the central bank. At the same time, SLR (Statutory Liquidity Ratio) is the percentage of a bank’s total deposits that must be invested in government bonds and other liquid assets.
- CRR helps control the money supply in the economy, whereas SLR ensures banks maintain a safety buffer to cover customer withdrawals.
- Banks don’t earn interest on CRR deposits, but they do earn interest on SLR investments.
CRR vs SLR
CRR is a percentage of a bank’s total deposits that must be kept with the central bank as a reserve, allowing the central bank to control the amount of money available for lending. SLR is a percentage of a bank’s total deposits that must be kept in government securities, limiting the amount of money banks can lend.
The Cash Reserve Ratio, or CRR, is the percentage of the total deposits that commercial banks are required to keep in the form of cash with India’s central bank, the Reserve Bank of India.
As a result, banks are not permitted to use money held by the RBI for economic or commercial purposes.
The Statutory Liquidity Ratio, or SLR, is the percentage of Net Demand and Moment Deposits that banks must hold on hand as reserves in the form of liquid assets such as cash, gold, or investments at any one time.
Every day at the end of the business, banks are required to keep a certain percentage of their NDTL in liquid assets.
Comparison Table
| Parameters of Comparison | CRR | SLR |
|---|---|---|
| Full-Form | Cash Reserve Ratio | Statutory Liquidity Ratio |
| Maintained By | RBI | Commercial banks |
| Meaning | It is the net demand and time liability of a bank that they must retain in the form of liquid assets. | The banks earn no interest. |
| Returns | It’s to be maintained as liquid assets like gold, cash, etc. | Interest can be earned. |
| Current Rate | CRR rate is 4%. | SLR rate is 19.5% |
| Form | It’s to be maintained in the form of cash. | It’s to be maintained in the form of liquid assets like gold, cash, etc. |
| Purpose | It helps control the overall flow of money. | It helps meet the sudden demands of depositors. |
| Regulates | It regulates the liquidity in the economy. | It regulates the credit facility. |
What is CRR?
The Reserve Bank of India calculates the Cash Reserve Ratio (CRR), which refers to the percentage of total deposits that banks must keep in cash as a reserve with the RBI rather than retaining the money with them.
This is an excellent instrument for managing the money flow in the market.
The bank’s deposit with the RBI grows when the CRR is high, decreasing the bank’s ability to lend. As a result, interest rates rise as borrowing becomes more expensive, and the market’s money supply shrinks, lowering inflation.
When the CRR falls, the bank’s deposit with the RBI falls, increasing the bank’s lending capacity and, as a result, interest rates fall as borrowing becomes more affordable. The flow of money in the market grows, and inflation rises.
CRR aids RBI in managing inflation by allowing it to control the movement of money in the market.
In other words, if RBI wants to increase the money flow in the market, it will lower CRR; if RBI wants to decrease the money flow in the market, it will raise CRR.
CRR is a powerful tool for regulating bank lending capacity and controlling the money supply in the economy. Typically, it takes the form of cash held in a bank vault or deposits made with the central bank.
What is SLR?
The Reserve Bank of India (RBI) calculates the Statutory Liquidity Ratio (SLR) (RBI). The percentage of a bank’s necessary deposit must be kept in cash, gold, and other RBI-approved securities.
In other words, the bank keeps it as a liquid asset. The goal of keeping SLR is to ensure that the bank has sufficient liquid assets to deal with a sudden surge in demand for the amount from the depositor.
It is utilized by the RBI to limit credit facilities granted by banks to borrowers to maintain the bank’s soundness. SLR is a percentage of the bank’s net time and demand liability.
The amount payable to the customer after an interval is referred to as time liability, while demand liability refers to the amount payable to the customer when he demands the same.
SLR also protects the bank from a bank run and gives customers trust in the banking system.
SLR has several objectives. Limiting bank loan expansion, controlling inflation and propelling growth, ensuring bank solvency, and increasing bank investment in government assets are only a few.
Main Differences Between CRR and SLR
- CRR, an abbreviation for Cash Reserve Ratio, is maintained by RBI and SLR, Statutory Liquidity Ratio, is maintained by commercial banks.
- CRR refers to the percentage of a commercial bank’s total deposit to be kept with the central bank. On the other hand, SLR refers to the net demand and time liability of a bank that is retained by them in the form of liquid assets.
- With CRR, no interest is earned by the bank, whereas in SLR, interest is earned.
- CRR helps control the overall flow of money, whereas SLR helps meet any sudden demands of depositors.
- CRR regulates the liquidity in the economy. On the other hand, SLR regulates credit facilities.
References
- http://www.ijrar.org/papers/IJRAR19D1332.pdf
- https://www.tandfonline.com/doi/abs/10.1080/17520843.2016.1270984
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This post provides a good introduction to CRR and SLR, but lacks a critical examination of the limitations and criticisms associated with these economic strategies.
The explanation provided is clear and concise, a well-researched piece that caters to readers looking for an introduction to CRR and SLR mechanisms.
The content is well curated and explains complex terms in a simple manner; great for an overview for beginners.
The post provides a comprehensive understanding of CRR and SLR, making it easier to comprehend their regulations and their role in the economy.
It’s a good piece, but lacks in-depth analysis of the comparison between CRR and SLR, which could provide a more nuanced perspective.
The article covers the basics well enough, but could benefit from more analytical insights into the impact and relevance of CRR and SLR in the current economic scenario.
I agree with your point; a more detailed comparison of CRR and SLR would indeed enrich the understanding of these economic concepts.
Excellent elaboration on CRR and SLR and how they are used to manage money circulation. Great work!