Difference Between CRR & SLR
CRR and SLR are the components of the monetary policy provided by RBI to control the money flow in the economy. However, there are a few differences between CRR and SLR. Lets see the comparison CRR vs SLR in this article.
Functions of RBI
- Reserve Bank of India (RBI), the apex body in India’s banking system is tasked with the responsibility to manage money supply, credit availability, price stability, financial stability, healthy balance of payment and controlling inflation.
- It uses a variety of instruments as provided in the monetary policy to control the money flow in the economy. Some of these include cash reserve ratio, statutory liquidity ratio, open market operations, bank rate policy, credit ceiling, repo rate, reverse repo rate and credit authorizations scheme.
Primary Functions of RBI are :
- To control the supply of money in the economy i.e how much money is available for the industry or the economy and
- To control the cost of credit meaning what is the price that the economy has to pay to borrow that money.
- These two things (Supply of money and cost of credit) are closely monitored and controlled by RBI. The inflation and growth in the economy are primarily impacted by these two factors.
- The various methods employed by the RBI to control credit creation power of the commercial banks can be classified into two groups, viz., quantitative controls and qualitative controls.
- Quantitative controls are designed to regulate the volume of credit created by the banking system Qualitative measures or selective methods are designed to regulate the flow of credit in specific uses.
- To control inflation and the growth, RBI uses certain tools like Cash Reserve Ratio, Statutory Liquityt Ratio, Repo Rate and Reverse Repo Rate.
What Is CRR?
- Cash Reserve Ratio (CRR) is the percentage of total deposits in the form of cash, which a commercial bank has to keep as reserves in the form of cash with the RBI.
- The banks are not allowed to use that money, kept with RBI, for economic and commercial purposes. It is a tool used by the Central Bank of India to regulate the liquidity in the economy and control the flow of money in the country.
You deposit say Rs 1000 in your bank. Then Bank receives Rs 1000 and has to put some percentage of it with RBI. If the prevailing CRR is 6% then they will have to deposit Rs 60 with RBI and they are left with Rs 940.
Your bank can not use this Rs 60 for its commercial activities like lending or investment purpose. This Rs60 is deposited in current account with RBI.
What is SLR?
- Statutory Liquidity Ratio (SLR) is a percentage of Net Time and Demand Liabilities kept by the bank in the form of liquid assets like government approved securities (bonds), Gold, cash etc.
- It is used to maintain the stability of banks through limiting the credit facility offered to its customers.
- The banks hold more than the required SLR and the purpose of maintaining the SLR is to hold a certain amount of money in the form of liquid assets, so as to fulfill the demand of the depositors when arises.
You deposit say Rs 1000 in your bank. Then Bank receives Rs 1000 and has to put some percentage of it with RBI as SLR. If the prevailing SLR is 20% then they will have to invest Rs 200 in Government securities.
Meeting Both CRR and SLR Requirements
To meet both CRR and SLR requirements, bank have to set aside Rs 260 (Rs 60 + Rs 200). Thus, after meeting both CRR and SLR requirements, bank is left Rs.740 with it for lending the money as Individual or Corporate loan.