Table Of Contents
CRR vs SLR Differences
Cash Reserve Ratio (CRR) is a percentage of money to be kept by all the banks with the Reserve Bank of India in cash. Hence, it regulates the flow of money in the economy. In contrast, the Statutory Liquidity Ratio (SLR) is the time and demand liabilities of the bank, which are to be kept to maintain the bankās solvency, where both affect the bankās lending capacity.
Cash Reserve Ratio is the ratio of total deposit that banks need to keep as a reserve with RBI in cash. In contrast, the Statutory Liquidity Ratio is the compulsory ratio of the deposit that the bank maintains in the form of money, gold, and other securities prescribed by RBI. CRR and SLR are the basic tools in the economy that manage inflation and money flow in the country. RBI controls bank capacity of lending through them.
What is CRR?
RBI calculates the Cash Reserve ratio formula. CRR is the ratio of total deposit that banks need to keep as a reserve with RBI (Reserve Bank of India) in cash instead of keeping the amount with them. It is a powerful tool to control money flow in the market. If CRR is high, bank deposits with RBI increase, leading to a decrease in the bank's capacity to lend. Hence, the interest rate increases as borrowing become expensive, and the market's money flow decreases inflation. That is how the CRR ratio helps to reduce inflation. Whereas, when CRR decreases, bank deposit with RBI decreases, which leads to an increase in the bank's capacity to lend. Hence, the interest rate decreases as borrowing become cheap, and the market flow increases inflation. Through this RBI control flow of money in the market, CRR also helps RBI handle inflation.
Shortly, if RBI wants to increase the flow of money in the market, it will reduce CRR. Whereas, if RBI wants to decrease money flow in the market, it will increase CRR.
Example
If CRR is 5%, the bank has maintained ā¹5 from the deposit of ā¹100. On the other hand, If the bank has the assurance of ā¹200 million, then the bank has to keep ā¹10 million with RBI, i.e., 5% of the total ā¹200 million, and utilize ā¹190 million for lending.
What isĀ SLR?
SSLR is the Statutory Liquidity Ratio that RBI calculates. It is the compulsory ratio of the deposit that the bank maintains in the form of cash, gold, and other securities prescribed by RBI. In short, it is kept by the bank in for of liquid assets. The purpose of maintaining SLR is that the bank can have an amount in the form of liquid assets to handle a sudden increase in demand from the depositor.
RBI uses it to limit credit facilities offered by the bank to borrowers, maintaining its stability. SLR is a percentage of the bank's net time and demand liability. Here, time liability is the amount payable to the customer after an interval, and demand liability means the amount owed to the customer when he demands the same. SLR also protects the bank from a bank run situation and provides confidence to the customer in the banking system.
Example
Let SLR is 20%; then the bank has to retain ā¹20 from the deposit of ā¹100. Suppose the bank has a stake of ā¹200 million, then the bank has to save ā¹40 million, i.e., 20% of the total ā¹200 million, and can use ā¹160 million for banking purposes.
Video Explanation of CRR vs SLR
CRR vs SLRĀ Infographics
Key Differences Between CRR and SLR
- There is a difference in maintenance for CRR and SLR. The cash reserve ratio is maintained in cash. In contrast, the statutory liquidity ratio is held in cash, gold, and other securities prescribed by RBI.
- CRR helps RBI control the money flow in the market, whereas the statutory liquidity ratio helps the bank handle a sudden increase in depositors' demand
- RBI maintains deposit maintenance in the cash reserve ratio, whereas the bank retains the statutory liquidity ratio.
- A cash reserve ratio controls the liquidity in the country's economy, whereas SLR governs the country's credit growth.
- In the cash reserve ratio, banks do not earn any interest over the amount maintained at RBI, whereas one can earn interest on a deposit of SLR.
There are many similarities between SLR and CRR. Those are as follows:-
- RBI decides the SLR and CRR.
- SLR and CRR can affect inflation in the economy.
- RBI made it mandatory for the bank to maintain the statutory liquidity ratio and cash reserve ratio.
Comparative Table
| CRR | SLR |
|---|---|
| CRR is the deposit banks' ratio at RBI. | SLR is the ratio of the deposit that the bank needs to keep with them. |
| CRR is held in the form of cash. | SLR is held in gold, money, and other securities approved by RBI. |
| CRR helps to control the flow of money. | SLR helps to meet the sudden demand of depositors. |
| CRR has to be maintained with RBI. | SLR has to be supported by the bank. |
| CRR regulates liquidity in the economy. | SLR regulates credit facilities. |
| Banks do not earn any interest on the amount deposited in CRR. | Banks can earn interest on SLR. |
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