What is CRR, SLR and difference between CRR and SLR?
This article tells about CRR (Cash Reserve Ration) and SLR (Statutory Liquidity Ratio) and how these monetary tools are used to control liquidity, difference between these tools.
CRR-
Banks require keeping a certain percentage of total deposits in form of cash. Cash Reserve Ratio (CRR) is the amount which scheduled commercial banks have to keep with RBI (Reserve Bank of India).This ratio is decided by RBI and used to control liquidity. If RBI makes a decision to reduce CRR, then banks have to keep fewer amounts in form of cash with RBI. There will be more amounts available with commercial banks for lending and investment, now bank can reduce interest rates on various loans to utilize this excess fund. Thus this instrument is used by RBI and affects ecnomy, inflation and interest rates. This is also known as the liquidity ratio and cash asset ratio. It can be between three to twenty percent in India.
SLR-
SLR (Statutory Liquidity Ratio) is a portion of banks Net Demand and Time liabilities (NDTL) that Scheduled Commercial Banks are required to maintain with themselves in form of Cash, Gold, Government Bonds or unencumbered approved securities at closing of any business day. It regulates credit growth in country. RBI can increase it up to 40% of NDTL .this monetary tool is used by the RBI to ensure sufficient liquidity with banks. an increase in SLR will restricts banks lending capacity.
Difference between SLR and CRR
SLR restricts the bank’s leverage of pumping money into the economy. CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the RBI.
The other difference is that for SLR, banks can use cash, gold or unencumbered approved securities whereas with CRR it has to be only cash.
CRR is maintained in cash form with RBI, whereas SLR is maintained in liquid form with banks themselves.
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