Difference Between CRR & SLR

Introduction

CRR and SLR are the components of the monetary policy provided by the RBI to control the money flow in the economy. However, there are a few differences between CRR and SLR. Let’s see the  CRR and SLR differences through this article so that you are able to answer some basic questions like “what is CRR and SLR, distinguish between CRR and SLR, the role of CRR and SLR, CRR and SLR rate, the effect of CRR and SLR on economy” and many others.

Functions of RBI

Reserve Bank of India (RBI), the apex body in India’s banking system, manages 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. These include the cash reserve ratio and statutory liquidity ratio. Along with these two, it also includes open market operations, bank rate policy, credit ceiling, repo rate, reverse repo rate, and credit authorizations scheme.

Primary Functions of RBI are :

1. To control the supply of money in the economy, i.e., how much money is available for the industry or the economy and

2.   To control the cost of credit, what is the price 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. Therefore, these two factors primarily impact inflation and growth in the economy.

The various methods employed by the RBI to control the 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 intended to regulate the flow of credit in specific uses.

RBI uses Cash Reserve Ratio & Statutory Liquidity Ratio (CRR and SLR), Repo Rate, and Reverse Repo Rate tools to control inflation and growth.

What Is CRR?

CRR in banking, which stands for Cash Reserve Ratio, is the percentage of total deposits in cash, which a commercial bank has to keep as reserves in the form of money 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.

CRR Example

You deposit say Rs 1000 in your bank. Then the Bank receives Rs 1000 and has to put some percentage of it with RBI. For example, if the prevailing CRR is 6%, they will have to deposit Rs 60 with RBI and leave with Rs 940.

Your bank can not use this Rs 60 for commercial activities like lending or investment. So this Rs60 is deposited in the current account with RBI.

What is SLR in economics?

The SLR full form in economics is the Statutory Liquidity Ratio, a percentage of the bank’s Net Time and Demand Liabilities in liquid assets like government-approved securities (bonds), Gold, cash, etc. The SLR in banking is used to maintain the stability of banks by limiting the credit facility offered to its customers. Therefore, the banks hold more than the required SLR in India, and the purpose of maintaining the SLR is to keep a certain amount of money in the form of liquid assets to fulfill the depositors’ demand when it arises.

SLR Example

You deposit say Rs 1000 in your bank. Then the Bank receives Rs 1000 and has to put some percentage of it with RBI as SLR. If the prevailing SLR rate meaning is 20%, they will have to invest Rs 200 in Government securities.

Meeting Both CRR and SLR Requirements

To meet CRR and SLR requirements, the banks have to set aside Rs 260 (Rs 60 + Rs 200). Thus, after completing both CRR and SLR requirements, the bank leaves Rs.740 for lending the money as an individual or Corporate loan.

CRR VS SLR Comparison

SLR and CRR difference

Conclusion

So, the basic difference between the Cash Reserve Ratio and Statutory Liquid Ratio is that the CRR is a measure used by the central bank of India to regulate the liquidity in the economy. The central bank sets a minimum cash requirement that banks must hold in their vaults. In the case of statutory liquidity ratio (SLR), banks have to keep reserves of liquid assets by themselves. SLR is another measure used by the central bank to maintain the stability of the economic system by limiting the credit facility offered to its customers.