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.
CRR vs SLR
The main difference between CRR and SLR is that CRR, an abbreviation for Cash Reserve Ratio, refers to the percentage of a bank’s total deposits that is to be maintained by the RBI where SLR, an abbreviation for Statutory Liquidity Ratio, refers to the net demand and time liability of a bank that must be retained by them in the form of liquid assets.
The Cash Reserve Ratio, or CRR, is the percentage of the total deposits that commercial banks are required to keep with India’s central bank, the Reserve Bank of India, in the form of cash. 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 are required to 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 Between CRR and SLR
| Parameters of Comparison | CRR | SLR |
| Full-Form | Cash Reserve Ratio | Statutory Liquidity Ratio |
| Maintained By | RBI | Commercial banks |
| Meaning | Commercial banks are required to keep a percentage of their total deposits with the central bank. | It is the net demand and time liability of a bank that must be retained by them in the form of liquid assets. |
| Returns | No interest is earned by the banks. | 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, resulting in an increase in the bank’s lending capacity and, as a result, interest rates fall as borrowing becomes more affordable and the flow of money in the market grows, 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 money flow in the market, it will lower CRR, and if RBI wants to decrease 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). It’s the percentage of a bank’s necessary deposit that 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 in order to maintain the bank’s soundness. SLR is defined as 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 makes a demand for the same. SLR also protects the bank from a bank run and gives customers trust in the banking system.
SLR has a number of objectives. Limiting bank loan expansion, controlling inflation and propelling growth, ensuring bank solvency, and increasing bank investment in government assets are only a few of them.
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 the commercial banks themselves.
- CRR refers to the percentage of a commercial bank’s total deposit that is 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 it be 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 the credit facility,
Conclusion
The Cash Reserve Ratio (CRR) is a percentage of money that all banks must keep with the Reserve Bank of India in the form of cash to regulate the flow of money in the economy, whereas the Statutory Liquidity Ratio (SLR) is the bank’s time and demand liabilities that must be kept with the bank itself to maintain the bank’s solvency, and both have an impact on the bank’s lending capacity.
References
- http://www.ijrar.org/papers/IJRAR19D1332.pdf
- https://www.tandfonline.com/doi/abs/10.1080/17520843.2016.1270984