Important Differences Between CRR and SLR

Recently updated on August 20th, 2023 at 11:42 am

Cash Reserve Ratio (CRR)

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is used as a monetary policy tool by central banks to control the money supply in the economy.

When the central bank increases the CRR, the available amount of funds with the banks reduces. This leads to a decrease in the money supply in the economy and is used to curb inflation. On the other hand, when the central bank reduces the CRR, the amount of funds available with the banks increases, leading to an increase in the money supply in the economy and is used to boost economic growth.

CRR is also used as a tool to ensure the solvency of banks. By mandating that a certain percentage of deposits be held in reserve, the central bank ensures that banks have a cushion to fall back on in case of a crisis. This helps to prevent bank runs and promotes financial stability.

CRR is a percentage of the total deposits that banks have to maintain with the central bank. The central bank can increase or decrease this percentage to control the money supply in the economy. Banks are required to maintain a certain percentage of their deposits as cash with the central bank at all times. Banks are also required to keep a certain percentage of their deposits in the form of liquid assets such as government securities.

CRR is generally a passive monetary policy tool as it does not directly influence the money supply in the economy. However, it can be used to control the money supply indirectly by changing the amount of money that banks can lend. When the CRR is increased, banks have to hold more funds with the central bank, leaving less money available for lending. This leads to a decrease in the money supply in the economy. On the other hand, when the CRR is decreased, banks have to hold fewer funds with the central bank, leaving more money available for lending. This leads to an increase in the money supply in the economy.

Statutory Liquidity Ratio (SLR)

Statutory Liquidity Ratio (SLR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves in the form of liquid assets, such as cash, gold, and government securities. SLR is used as a monetary policy tool by central banks to control the money supply in the economy, and also to ensure the solvency and liquidity of banks.

When the central bank increases the SLR, the amount of funds available with the banks for lending and investment reduces, leading to a decrease in the money supply in the economy. This is used to curb inflation. On the other hand, when the central bank reduces the SLR, the amount of funds available with the banks for lending and investment increases, leading to an increase in the money supply in the economy and is used to boost economic growth.

SLR is also used as a tool to ensure the solvency and liquidity of banks. By mandating that a certain percentage of deposits be held in liquid assets, the central bank ensures that banks have a cushion to fall back on in case of a crisis and can meet the cash withdrawal demands of depositors. This helps to prevent bank runs and promotes financial stability.

The SLR rate is determined and fixed by the central bank. It is generally expressed as a percentage of the total deposits that banks have to maintain in the form of liquid assets. The central bank can increase or decrease this percentage to control the money supply in the economy and ensure the solvency and liquidity of banks.

SLR is generally a passive monetary policy tool as it does not directly influence the money supply in the economy. However, it can be used to control the money supply indirectly by changing the amount of money that banks can lend and invest. When the SLR is increased, banks have to hold more funds in liquid assets, leaving less money available for lending and investment. This leads to a decrease in the money supply in the economy. On the other hand, when the SLR is decreased, banks have to hold fewer funds in liquid assets, leaving more money available for lending and investment. This leads to an increase in the money supply in the economy.

Important Differences Between CRR and SLR

There are a few important differences between Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR):

  1. Purpose: The main purpose of CRR is to control the money supply in the economy, while the main purpose of SLR is to ensure the solvency and liquidity of banks.
  2. Types of Reserves: CRR requires banks to hold a certain percentage of their deposits as cash reserves with the central bank, while SLR requires banks to hold a certain percentage of their deposits in the form of liquid assets such as cash, gold, and government securities.
  3. Monetary Policy: CRR is generally a passive monetary policy tool that does not directly influence the money supply in the economy. SLR, on the other hand, can be used to control the money supply indirectly by changing the amount of money that banks can lend and invest.
  4. Impact on Banks: An increase in CRR reduces the amount of funds available with banks for lending and investment, while an increase in SLR reduces the amount of funds available for lending and investment as well as the banks’ ability to meet the cash withdrawal demands of depositors.
  5. Flexibility: CRR is more flexible as it can be changed frequently to suit the needs of the economy, while SLR is generally changed less frequently.

In summary, CRR and SLR are two different monetary policy tools used by central banks to control the money supply in the economy and ensure the solvency and liquidity of banks. While they share some similarities, they have different specific functions and impacts on the economy and banks.

Mandatory provisions regarding SLR and CRR

In India, both SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio) are mandatory provisions that banks must maintain to ensure the stability of the financial system. Here are the details of each provision:

Statutory Liquidity Ratio (SLR):

SLR is the percentage of a bank’s net demand and time liabilities that it must maintain in the form of liquid assets such as government securities, gold, and approved securities. The objective of SLR is to ensure that banks have sufficient liquidity to meet any sudden demand for cash withdrawals from their customers.

The SLR is determined by the Reserve Bank of India (RBI) and can be changed from time to time. As of 2021, the SLR requirement for banks is 18% of their net demand and time liabilities.

Cash Reserve Ratio (CRR):

CRR is the percentage of a bank’s net demand and time liabilities that it must maintain as a reserve in the form of cash with the RBI. The objective of CRR is to ensure that banks have sufficient cash reserves to meet any sudden demand for withdrawals by their customers.

The CRR is also determined by the RBI and can be changed from time to time. As of 2021, the CRR requirement for banks is 4% of their net demand and time liabilities.

It is important to note that both SLR and CRR are non-interest-bearing reserves, which means that banks do not earn any interest on the amounts they are required to maintain under these provisions.

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