Difference between Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

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Central Bank of every country takes certain measures to control inflation, money circulation in the country, etc. For this purposes it prescribes certain ratios called as SLR and CRR, etc for defining the rules and regulations for Banks in the country.

STATUTORY LIQUIDITY RATIO (SLR)

Statutory liquidity ratio(SLR) is the term Indian government uses for reserve requirement that all the commercial banks in India has a compulsion to maintain in the form of gold, government securities before it starts providing credit its customers. Statutory Liquidity Ratio is fixed by Reserve Bank of India(RBI) and maintained by banks in order to control the expansion of bank credit.

The Statutory Liquidity Ratio (SLR) is commonly used to control inflation and maintain growth in the country, by increasing or decreasing the Statutory Liquidity Ratio.SLR is used by banks and shows the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other government securities.If any Indian bank failed to comply with the terms of RBI to the required level of Statutory Liquidity Ratio, then it becomes liable to pay penalty to Reserve Bank of India.

CASH RESERVE RATIO (CRR)

Cash reserve Ratio (CRR) is the amount of Cash that the commercial banks have to keep in the form of reserves in the current account maintained with RBI. In reality, banks deposit this amount with RBI instead of keeping this money with them. The cash reserve ratio is used as a tool in monetary policy, to influence the country’s borrowing and interest rates by changing the amount of cash available for banks to give loans to its customers.

This ratio is calculated by RBI, and it is in the jurisdiction of the apex bank to keep it high or low depending upon the cash flow in the economy. When RBI lowers CRR, it allows banks to have surplus money that they can lend to customers or invest anywhere they want. On the other hand, a higher CRR means banks have a lesser amount of money at their disposal to distribute.

COMPARISON TABLE

Let us see some of the differences and the variety of functions for which the CRR and SLR are used.

CASH RESERVE RATIO STATUTORY LIQUIDITY RATIO
Each bank has to keep a certain percentage of its total deposits with RBI as cash reserves. It’s a ratio of Net Demand and Time Liabilities (NDTL) of a bank which bank have to keep with it in form of liquid assets such as gold, cash etc.
Function
CRR limits the ability of the banks to pump more money into the economy. SLR is used to limit the expansion of bank credit, for ensuring the solvency of banks.
Maintained by
CRR is maintained with RBI in the form of liquid cash.Banks deposit the cash with RBI which is conceived as holding cash with RBI. Commercial banks themselves maintain SLR in liquid form.
Returns
Banks don’t earn any returns from the money parked in the form of CRR. However, banks can earn returns from Statutory Liquidity Ratio (SLR)
Present Rate
The Present rate of Cash Reserve Ratio (CRR)is 4%. The present SLR is 20.75%, but RBI has the power to increase it up to 40% ,if it so deems fit in the interest of the economy.
Reporting and Formula
Once every fortnight - which is a designated Friday by RBI, the bank has to report their NDTL (Net demand and Time Liabilities) and the Cash with RBI to the RBI. SLR rate = (liquid assets / (demand + time liabilities)) × 100%
Example
When a bank's NDTL increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold Rs. 9 with RBI and the bank will be able to use only Rs 91 for investments and lending, credit purpose. If you deposit Rs. 100/- in bank, CRR being 9% and SLR being 11%, then bank can use 100-9-11= Rs. 80/- for giving loan or for investment purpose.
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