INTRODUCTION

Definition of CRR
Cash Reserve Ratio abbreviated as CRR is the percentage of total deposits which a
commercial bank has to keep as reserves in the form of cash with Central Bank of India,
however the banks are not allowed to use that money for economic and commercial
purposes. It is a tool used by the Central Bank of India, which regulates the liquidity in the
economy and controls the flow of money in the country. Therefore, if the RBI wants to
increase the money supply in the economy, it will reduce the rate of CRR while if RBI wants
to decrease the money supply in the market then it will increase the rate of CRR.
Cash Reserve Ratio can be explained easily with an example- If the rate of CRR is 5% then
for every deposit of Rs. 100 the bank will keep the Rs. 5 with RBI and the rest of Rs. 95 can
be used for further lending to customers or investing them anywhere else.

Definition of SLR
Statutory Liquidity Ratio abbreviated as an SLR, is a percentage of Net Time and Demand
Liabilities kept by the bank in the form of liquid assets. It is used to maintain the stability of
banks through limiting the credit facility given by the banks to its customers. Generally, the
banks hold more than the required SLR.The purpose of maintaining SLR is to hold a certain
amount of money in the form of liquid assets to fulfill the demand of the depositors.
Here Time Liabilities mean the amount of money which is made payable to the customer
after a certain period of time while the demand liabilities means the amount of money which
is made payable to the customer at the time when it is demanded.
Statutory Liquidity Ratio can be explained easily with an example- If the rate of SLR is 25%
then for every deposit of Rs. 100 the bank will keep the Rs. 25 by itself to meet the
requirement of the customer and the rest of the Rs. 75 can be used for further lending to
customers or investing them anywhere else.

Key Differences between CRR and SLR

1. CRR is the percentage of money, which a bank has to keep with RBI in the form of cash.
On the other hand , the proportion of liquid assets to time and demand liabilities.
2. The next difference between these two is that CRR is maintained in the form of cash
while the SLR is to be maintained in the form of gold, cash and government approved
securities.
3. CRR controls the flow of money in the economy whereas SLR ensures the solvency of
the banks.
4. CRR is maintained by RBI, but SLR is not maintained by RBI.
5. The liquidity of the country is regulated by CRR while the credit growth of the country is
regulated by SLR.
Similarities

CRR and SLR both are related to banks.

CRR and SLR both are prescribed by Central Bank of India.

Both can affect inflation to rise or fall, in the economy.

Both are mandatory for banks to maintain.

Difference Between CRR and SLR

November 17, 2014 By Surbhi S Leave a Comment

CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) are the two terms related to
banks, but most of us dont know the meaning and the difference between them, however the
fluctuations in the inflation and growth of the country depends on these two. These are the
major tools in the economy, which reduces the banks lending capacity and manages the
money flow in the country. So come and lets understand the meaning and the difference
between CRR and SLR.

COMPARISON CHART
Basis of
Comparison

Meaning

CRR

SLR

CRR is the percentage of money

The bank has to keep a certain percentage

which the bank has to keep with

of their Net Time and Demand

Central Bank India in the form

Liabilities in the form of liquid assets

of cash.
Form

Cash

specified by RBI.
Cash and other assets like gold and
government securities. Generally
central and state government securities.

Effect

Maintainence
with

Regulates

It controls excess money flow in the

economy.

It helps in meeting out the unexpected

demand of any depositor by selling the
bonds.

Central Bank of India i.e. RBI.

Bank itself.

Liquidity in the economy.

Credit growth in the economy.

NEED OF ALL THESE CRR,SLR,REPO RATES

RBIs main job = control inflation by controlling money supply in the market.

Too much money in the market =easy to get loans= not good. Because Itll create inflation.
[Demand Pull]

Too less money in the market= again not good, because businessmen find it hard to get
loans, thus input cost of production increases= not good for economy either and itll create
inflation. [Cost push]

Therefore, RBI will increase/decrease these CRR, SLR and Repo Rates according to the
situation in order to adjust the money supply in market and thus control inflation. [Monetary
policy]

Nowadays RBI doesnt touch Bank rate much and mostly relies on Repo rate to control the
money supply.

CRR and SLR are also not changed as frequently as Repo rate.

And Reverse repo rate is automatically kept 1% less than Repo rate, so that makes Repo rate
the most frequently used tool in RBIs monetary policy, in last two years.

Apart from that, CRR,SLR and Repo Rate also help those competitive magazine wallas to
fill up pages with ridiculously unimportant data tables to make your life more miserable.

THE PROBLEM WITH CRR

CRR serves two purposes

o Control money supply in the market

o Acts like the library deposit, so if your bank goes broke / doesnt play by the
rules then RBI can use its CRR deposit to temporarily fix things.

Earlier, RBI had to pay interest rates on CRR deposits.

But in 2007, Government amended the RBI act so now RBI doesnt have to pay any
interest on the CRR deposits.

Obviously the SBI, ICICI etc wouldnt like it because their money is sitting idle in the
lockers of RBI without earning any interest.

They want CRR provision to be deleted.

CONCLUSION
Reserve Bank of India, the Central Bank of India has to maintain the supply of money in the
economy and for this purpose, it uses tools, like Bank Rate, Repo Rate, Reverse Repo Rate,
CRR and SLR. In the above discussion we had talk about difference between CRR and SLR,
finally we came to the conclusion that both are in the form of reserves in which the money is
blocked in the economy and is not used for further lending and investments.