Difference Between CRR vs SLR
Central Bank of every country is responsible to keep a check and have certain measures of control on inflation and money circulation in the industry. The central bank uses factors like CRR vs SLR to keep it under a tap.
CRR is the abbreviated version of the Cash Reserve Ratio. It is the mandatory ratio that must be retained with the central bank of the country. It is compulsory for each bank to maintain a specific percentage of their net demand and the time liabilities as cash balance with the RBI (Reserve Bank of India).
Similarly, SLR standing for Statutory Liquidity Ratio, is an obligatory reserve to be kept by the banks, as prescribed by the bank, based on a specified percentage of net demand and time liabilities.
The factors of inflation and growth rate of a country are highly influenced by these tow ratios. Both Cash Reserve Ratio and Statutory Liquidity Ratio are financial tools that reduce the bank’s lending capacity and manages money flow in the market.
CRR – Cash Reserve Ratio
- Percentage of total deposits with a commercial bank (Indian Commercial Bank) that must be kept with the Central Bank of India in the form of cash as reserves
- The banks are not permitted to use this amount with the Central Bank for an economic and commercial purpose.
- It is the mode of maintaining liquidity in the economy and the flow of money.
- If the Reserve Bank of India wishes to increase the money supply in the economy, it will reduce the CRR rate., thereby allowing banks to spend/ lend more
- Conversely, if the RBI plans to limit the money supply in the economy, it will increase the CRR rate and hence the banks will have limited funds to lend as their greater amount of funds (or cash) shall be blocked with the Reserve Bank.
SLR – Statutory Liquidity Ratio
- The percentage of Net Time and Demand Liabilities kept by the bank in the form of liquid assets.
- A unique way of sustainable stability by putting a cap on the customer’s credit facility.
- The major reason to have a huge SLR is to fulfill the unexpected demands from the depositors.
- The banks usually maintain a higher SLR than what is required
- Time Liabilities is the amount payable to the depositors after a specific time
- Demand Liabilities is the amount payable to the depositors when the demand arises
For Example:
Consider a CRR rate of 4%. This means for every Rs. 100 deposited, Rs. 4 must be deposited with the Central Bank and shall not be used for any commercial purposes, and the remaining Rs. 96 can be used for commercial and lending purposes.
Consider an SLR rate of 15%. This means the banks shall keep Rs. 15 to themselves to meet the requirements of the customers and the remaining Rs. 85 shall be available to the bank for other operations and commercial purposes.
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CRR vs SLR Infographics
Below is the top 6 difference between CRR vs SLR:
Key Differences CRR vs SLR
Both CRR vs SLR are popular choices in the market; let us discuss some of the major Difference Between CRR vs SLR:
- The percentage of the money parked by the commercial banks with the Reserve Bank of India in form of cash is CRR. Contrastingly, SLR is a portion of liquid assets to demand and time liabilities withheld with the bank themselves.
- CRR is maintained in the form of cash whereas the SLR is maintained in the form of liquid assets like gold, treasury bonds, etc.
- The commercial banks earn no interest on the money they have parked with the RBI, whereas they can earn good returns upon the SLR liquid assets that they withhold.
- CRR is to regulate the flow of money in the economy whereas SLR is to keep up with the solvency of the banks
- Moreover, CRR is to govern the liquidity of the country and SLR is essential for the credit growth of the country.
- CRR is maintained by the Reserve Bank of India, but it does not maintain the SLR
CRR vs SLR – Comparison Table
Let’s have a look at the Comparison between CRR vs SLR:
The basis of comparison between CRR vs SLR | Cash Reserve Ratio (CRR) | Statutory Liquidity Ratio (SLR) |
Meaning | Every commercial bank must keep a percentage of its total deposits with the central bank | It is a ratio of Net Demand and Time Liabilities of a bank, which is to be retained with the bank in the form of liquid assets like cash, gold, etc |
Functionality | To limit/ enhance the supply of money in the economy. | Used to limit the expansion of bank credit, to ensure high solvency |
Maintained by | Maintained by the RBI in the form of Liquid Cash. | Commercial banks maintain liquid assets with themselves in the form of liquid assets |
Returns | Banks earn no interest for the money they have locked with the RBI | Banks can earn returns on the SLR they withhold |
Reporting | Once in 14 days (selected as a Friday by the RBI), the commercial bank must report their Net Demand and Time Liabilities along with the cash to the RBI | |
Current Rate (in India) | The Current CRR Rate in India is 4% | The current SLR Rate in India is 19.5%. This can be raised to up to 40% by the RBI norms to facilitate the economy. |
Conclusion
The main responsibility of the Reserve Bank of India is to keep up the supply of money in the economy and to do this, the RBI uses instruments like Repo Rate, Reverse Repo Rate, Cash Reserve Ratio, Statutory Liquidity Ratio, and Bank Rate. Based on the situation of the economy and inflation, the RBI and the Finance Ministry of the country decide the fate of the inflation rates and the growth rates of the country. To contribute to this, CRR vs SLR are important financial instruments. Both CRR vs SLR are reserves that block the money flow in the economy and thereby reduce the lending and investments in the country.
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