What is SLR and CRR in Banking

What is SLR and CRR in Banking

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Everything you should know about CRR and SLR rates and their differences

Key Takeaways

  • CRR is a reserve maintained by banks with the RBI.
  • It is a percentage of the banks' deposits maintained in cash form.
  • SLR is an obligatory reserve that commercial banks must maintain themselves.
  • It is a percentage of commercial banks' net demand and time liabilities, maintained as approved securities.
  • While CRR maintains cash flow in the economy, SLR keep banks solvent.

A crucial sector of any economy is its banking sector. It often serves as a mirror to the overall economy, with banking activity enabling investment decisions. Along with repo rate, reverse repo rate, etc., Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are crucial components of banking operations. The two ratios help determine the liquidity in the banking system and indicate national inflation and growth fluctuations. So let us understand what CRR and SLR rate means and how are they different.

CRR – Meaning

As mentioned above, CRR stands for Cash Reserve Ratio. It is a compulsory reserve that the central bank of the country – The Reserve Bank of India (RBI), must maintain. Every commercial bank is obligated to maintain CRR, which is a specified percentage of their net demand and time liabilities.

Commercial banks must maintain the CRR in the form of cash balances with the RBI. These banks are not allowed to use the money for economic or commercial purposes.

Essentially, CRR represents the minimum percentage of deposits that a commercial bank must keep as a cash reserve with the RBI. The RBI uses CRR to maintain liquidity and cash flow in the economy.

SLR – Meaning

SLR stands for Statutory Liquidity Ratio. It is an obligatory reserve that commercial banks must maintain. Commercial banks may maintain this reserve requirement in the form of approved securities per a specific percentage of the net demand and time liabilities.

SLR can also be defined as a tool used to maintain the stability of the banks by restricting the credit facility they offer to their customers. Banks usually hold more than the required SLR, per RBI norms stating that they must maintain a certain amount of money as liquid assets. This helps banks fulfil their depositors' demands as and when they arise.

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What is the difference between CRR and SLR?

The following are the key differences between CRR and SLR:

Parameters

CRR

SLR

Meaning

It is a percentage of money that a bank has to keep with the RBI.

It is a proportion of liquid assets per a percentage of time and demand liabilities.

Form

Maintained in the form of cash.

Maintained in the form of cash, gold and government-approved securities.

Uses

Regulates the flow of money in the economy.

Ensures the solvency of banks.

Reserved With

Reserved with the RBI.

Reserved with commercial banks.

National Impact

Regulates the liquidity of cash in the country.

Maintains the credit growth of the country.

Final Note

Both CRR and SLR are crucial to the economy as they maintain cash flow and regulate liquidity in the country. These financial rates have an undeniable impact on the loan market of the country. The rates also change as per the changes in the economic climate of the country. You can always check the current CRR rate and SLR rates on the RBI website or reach out to your bank for more information.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.

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