CONCEPT – CRR AND SLR

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 CONCEPT – CRR AND SLR

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• Cash reserve Ratio (CRR) is a percentage of money to be kept by all the banks with Reserve Bank of India in the form of cash and hence it regulates the flow of money in the economy. 
• Statutory liquidity ratio (SLR) is time and demand liabilities of the bank which are to be kept with the bank itself to maintain solvency of the bank, where both affects lending capacity of the bank.
• CRR : Cash Reserve ratio is calculated by RBI, CRR is the ratio of total deposit that banks need to keep as a reserve with RBI (Reserve Bank of India) in form of cash instead of keeping amount with them. This is a powerful tool to control the flow of money in the market. If CRR is high, bank deposit with RBI increases which leads to decrease in capacity of the bank to lend and hence, interest rate increase as borrowing becomes expensive and flow of money in market decrease inflation decreases, this is how CRR ratio help to reduce inflation. Whereas, when CRR decreases bank deposit with RBI decreases which leads to increase in capacity of the bank to lend and hence, interest rate decrease as borrowing becomes cheap and flow of money in market increase inflation increases. Through this RBI control flow of money in the market, CRR also helps RBI to handle inflation. In short, if RBI wants to increase the flow of money in the market it will reduce CRR whereas; if RBI wants to decrease the flow of money in the market it will increase CRR.
• Example : If CRR is 5%, the bank has maintained INR 5 from the deposit of INR 100, that means if the bank has the deposit of  INR 200 Million then the bank has to maintain 10 Million with RBI i.e. 5% of total 200 Million and the bank can use rest 190 Million for lending.
• SLR : SLR is the Statutory Liquidity Ratio which is calculated by RBI, this is the ratio of compulsory ratio of the deposit that the bank has to maintain in form of cash, gold, other securities prescribe by RBI. In short, it is kept by the bank in for of liquid assets. The purpose of maintaining SLR is that the bank will have an amount in the form of liquid assets which can be used to handle a sudden increase in demand for the amount from the depositor. It is used by RBI to limit credit facilities offered by the bank to borrowers which maintain the stability of the bank. SLR can be said as a percentage of net time and demand liability kept by the bank. Here, time liability the amount which is payable to the customer after interval and demand liability means the amount which is payable to the customer when he is demanding for the same. SLR also protects the bank from a bank run situation and provides confidence to the customer in the banking system.
• Example : Let SLR is 20% then the bank has to keep INR 20 from the deposit of INR 100, that means if the bank has a deposit of  INR 200 Million then bank have to keep 40 Million i.e. 20% of total 200 Million and a bank can use rest 160 Million for banking purpose.
• Key differences between CRR and SLR : 

1. There is a difference in a form in which maintenance is done for both Cash Reserve ratio is maintained in form of cash whereas Statutory Liquidity Ratio is maintained in form of cash, gold, other securities prescribe by RBI. 
2. CRR helps RBI to control the flow of money in the market whereas SLR helps the bank to handle a sudden increase in demand of depositors. 
3. Maintenance of deposit is done by RBI in Cash Reserve ratio whereas in Statutory Liquidity Ratio maintenance is done by the bank itself. 
4. The liquidity in the economy of the country is controlled by CRR whereas SLR governs the credit growth of the country. 
5. In CRR, banks don’t earn any interest over the amount maintain at RBI whereas interest can be earned on deposit of SLR.

• There are many similarities between SLR and CRR, those are as follows:-

1. RBI decides the rate of both CRR and Statutory Liquidity Ratio.
2. Both can affect inflation in the economy.
3. RBI made it compulsory for the bank to maintain Statutory Liquidity Ratio and Cash Reserve ratio

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