Cash Reserve Ratio, or popularly known as CRR is a compulsory reserve that must be maintained with the Central Bank. Every banking company is required to maintain a specific percentage of their net demand and time liabilities as cash balance with the Reserve Bank of India.
On the other hand, Statutory Liquidity Ratio, shortly called as SLR also an obligatory reserve to be kept by the banks, as prescribed securities, based on a certain percentage of net demand and time liabilities.
The fluctuations in the inflation and growth of the country depend on these two ratios. CRR and SLR are the primary tools in the economy, which reduces the bank’s lending capacity and manages the money flow in the market. So come and let’s understand the meaning and the difference between CRR and SLR.
Content: CRR Vs SLR
|Basis for Comparison||CRR||SLR|
|Meaning||CRR is the percentage of money which the bank has to keep with the Central Bank of India in the form of cash.||The bank has to keep a certain percentage of their Net Time and Demand Liabilities in the form of liquid assets as specified by RBI.|
|Form||Cash||Cash and other assets like gold and government securities viz. Central and State government securities.|
|Effect||It controls excess money flow in the economy.||It helps in meeting out the unexpected demand of any depositor by selling the bonds.|
|Maintainence with||Central Bank of India i.e. RBI.||Bank itself.|
|Regulates||Liquidity in the economy.||Credit growth in the economy.|
Definition of CRR
Cash Reserve Ratio abbreviated as CRR is the percentage of total deposits, which a commercial bank has to keep as reserves in the form of cash with the Central Bank of India. The banks are not allowed to use that money, kept with RBI, for economic and commercial purposes. It is a tool used by the Central Bank of India to regulate the liquidity in the economy and control the flow of money in the country.
Therefore, if the RBI wants to increase the money supply in the economy, it will reduce the rate of CRR while, if RBI seeks to decrease the money supply in the market then it will increase the rate of CRR.
Cash Reserve Ratio can be explained easily with an example- If the rate of CRR is 5% then for every deposit of Rs. 100 the bank will keep the Rs. 5 with RBI and the rest of the Rs. 95 can be used for further lending or any other commercial purposes.
Definition of SLR
Statutory Liquidity Ratio abbreviated as an SLR, is a percentage of Net Time and Demand Liabilities kept by the bank in the form of liquid assets. It is used to maintain the stability of banks through limiting the credit facility offered to its customers. The banks hold more than the required SLR and the purpose of maintaining the SLR is to hold a certain amount of money in the form of liquid assets, so as to fulfill the demand of the depositors when arises.
Here, Time Liabilities mean the amount of money which is made payable to the customer after a period of time while the demand liabilities means the amount of money which is made payable to the customer at the time when it is demanded.
Statutory Liquidity Ratio can be explained easily with an example- If the rate of SLR is 25% then for every deposit of Rs. 100 the bank will keep the Rs. 25 by itself to meet the requirements of the customers and the rest of the Rs. 75 can be used for any other commercial purposes.
Key Differences between CRR and SLR
- CRR is the percentage of money, which a bank has to keep with RBI in the form of cash. On the other hand, SLR is the proportion of liquid assets to time and demand liabilities.
- The next difference between these two is that CRR is maintained in the form of cash while the SLR is to be maintained in the form of gold, cash and government approved securities.
- CRR regulates the flow of money in the economy whereas SLR ensures the solvency of the banks.
- CRR is maintained by RBI, but RBI does not maintain SLR.
- The liquidity of the country is regulated by CRR while SLR governs the credit growth of the country.
- CRR and SLR both are related to banks.
- CRR and SLR both are prescribed by the Central Bank of India.
- Both can affect inflation to rise or fall, in the economy.
- Both are mandatory for the banks to maintain.
The Reserve Bank of India, a Central Bank has to keep the supply of money in the economy and for this purpose, it uses tools, like Bank Rate, Repo Rate, Reverse Repo Rate, CRR and SLR. In the above discussion, we had talked about differences between the CRR and SLR. Finally, we came to the conclusion that both are in the form of reserves, in which the money is blocked in the economy and is not used for further lending and investment purposes.