INTRODUCTION

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 Central Bank of India, however the banks

are not allowed to use that money for economic and commercial purposes. It is a tool used by the

Central Bank of India, which regulates the liquidity in the economy and controls 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 wants 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 Rs. 95 can be used

for further lending to customers or investing them anywhere else.

 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 given by the banks to its customers. Generally, the

banks hold more than the required SLR.The purpose of maintaining SLR is to hold a certain

amount of money in the form of liquid assets to fulfill the demand of the depositors.

Here Time Liabilities mean the amount of money which is made payable to the customer after a

certain 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 requirement

of the customer and the rest of the Rs. 75 can be used for further lending to customers or

investing them anywhere else.

Key Differences between CRR and SLR

1. CRR is the percentage of money, which a bank has to keep with RBI in the form of cash.

On the other hand , the proportion of liquid assets to time and demand liabilities.

2. 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.

3. CRR controls the flow of money in the economy whereas SLR ensures the solvency of

the banks.

4. CRR is maintained by RBI, but SLR is not maintained by RBI.

5. The liquidity of the country is regulated by CRR while the credit growth of the country is

regulated by SLR.

Similarities

CRR and SLR both are related to banks.

CRR and SLR both are prescribed by Central Bank of India.

Both can affect inflation to rise or fall, in the economy.

Both are mandatory for banks to maintain.

Difference Between CRR and SLR

November 17, 2014 By Surbhi S Leave a Comment

CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) are the two terms related to

banks, but most of us don’t know the meaning and the difference between them, however the

fluctuations in the inflation and growth of the country depends on these two. These are the

major tools in the economy, which reduces the banks lending capacity and manages the

money flow in the country. So come and lets understand the meaning and the difference

between CRR and SLR.

COMPARISON CHARTBasis of

ComparisonCRR SLR

Meaning

CRR is the percentage of money

which the bank has to keep with

Central Bank 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

specified by RBI.

Form Cash

Cash and other assets like gold and

government securities. Generally

central and state government securities.

EffectIt controls excess money flow in the

economy.

It helps in meeting out the unexpected

demand of any depositor by selling the

bonds.

Maintainence

withCentral Bank of India i.e. RBI. Bank itself.

Regulates Liquidity in the economy. Credit growth in the economy.

NEED OF ALL THESE CRR,SLR,REPO RATES

RBI’s main job = control inflation by controlling money supply in the market.

Too much money in the market =easy to get loans= not good. Because It’ll create inflation.

[Demand Pull]

Too less money in the market= again not good, because businessmen find it hard to get

loans, thus input cost of production increases= not good for economy either and it’ll create

inflation. [Cost push]

Therefore, RBI will increase/decrease these CRR, SLR and Repo Rates according to the

situation in order to adjust the money supply in market and thus control inflation. [Monetary

policy]

Nowadays RBI doesn’t touch Bank rate much and mostly relies on Repo rate to control the

money supply.

CRR and SLR are also not changed as frequently as Repo rate.

And Reverse repo rate is automatically kept 1% less than Repo rate, so that makes Repo rate

the “most frequently used tool” in RBI’s monetary policy, in last two years.

Apart from that, CRR,SLR and Repo Rate also help those competitive magazine wallas to

fill up pages with ridiculously unimportant data tables to make your life more miserable.

THE PROBLEM WITH CRR

CRR serves two purposes

o Control money supply in the market

o Acts like the ‘library deposit’, so if your bank goes broke / doesn’t play by the

rules then RBI can use its CRR deposit to temporarily fix things.

Earlier, RBI had to pay interest rates on CRR deposits.

But in 2007, Government amended the RBI act so now RBI doesn’t have to pay any

interest on the CRR deposits.

Obviously the SBI, ICICI etc wouldn’t like it because their money is sitting idle in the

lockers of RBI without earning any interest.

They want CRR provision to be deleted.

CONCLUSION

Reserve Bank of India, the Central Bank of India has to maintain 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 talk about difference between 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 investments.