The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are instructions by the RBI on the banking system in India to deploy a minimum proportion of their deposits in particular forms. Both are two major direct instruments of the RBI’s monetary policy as well. They are designed to meet different purposes. The CRR is aimed to control the credit creating capacity of the banks by instructing them to keep certain proportion of the deposits as reserves with the RBI. This means that that reserves cannot be given as loan and that much money is not circulated in the economy. The SLR on the other hand, requires banks to deploy a certain proportion of their deposits in liquid assets like government securities. The objective of SLR is to ensure that all the funds are not loaned out to the public. If the banks are deploying a certain proportion of their deposits in liquid assets, it may help them to convert into cash in emergency time.
What is CRR?
The cash reserve ratio is the proportion of demand and time deposits (Net Demand and Time Liabilities) that every scheduled commercial bank has to keep with the RBI as cash reserves.
What is SLR?
Statutory Liquidity Ratio (SLR) is a requirement that commercial banks have to keep a certain proportion of their demand and time deposits as liquid assets in their vault. In the context of SLR, liquid assets mean assets in the form of cash, gold and approved securities (government securities).
Both are ratios that are expressed as a percentage of the bank’s deposits. The CRR and SLR are to be kept by the scheduled banks in India as well as local area banks which are non-scheduled banks. A Crucial difference is that while CRR is to be kept with the RBI, the SLR is to be kept with the concerned banks’ vault. The difference between the CRR and the SLR are given below.
Table: Difference between CRR and SLR
| CRR | SLR | |
| What is? | The percentage of total deposits (Net Demand and Time Liabilities or NDTL) that banks are required to hold as cash reserves with the RBI.
CRR should be kept on a daily basis. |
The percentage of total deposits (demand and time deposits) that banks are required to hold in the form of liquid assets such as government securities. The SLR should not exceed forty per cent. |
| Purpose | To control the money supply in the economy. | To ensure liquidity in the banking system. |
| To be kept with | RBI | Concerned bank itself |
| Regulator/Authority | RBI | RBI |
| Applicability for | Scheduled Commercial Banks (Including Regional Rural Banks), Local Area Banks, Small Finance Banks and Payments Banks.
Every Cooperative Bank. Local Area Banks. |
Scheduled Commercial Banks (Including Regional Rural Banks), Small Finance Banks and Payments Banks.
Local Area Banks. Cooperative Banks: Primary (Urban) co-operative banks/ state cooperative banks/ district central cooperative banks. |
| Liquidity | Reduces liquidity in the bank but, helps banks to avail the lender of last resort facility as it has deposits with the RBI. | Improves liquidity of banks by
providing a buffer against sudden withdrawals and loan defaults. |
| Penalty | Banks are penalized if they fail to
maintain the required CRR. |
Banks are penalized if they fail to
maintain the required SLR. |
| Effectiveness | CRR is a less effective tool to
manage the money supply. |
SLR is a more effective tool to manage the
money supply. |
| Working through example | If the CRR is 4%, and a bank has
total deposits of Rs 100 crores, it must hold Rs 4 crores as cash reserves with the RBI. |
If the SLR is 18%, and a bank has total
deposits and loans of Rs 100 crores, it must hold Rs 18 million as liquid assets, such as government securities. |
| Source for this note: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12131&Mode=0 | ||
Both the CRR and SLR are reserve requirements set by the RBI to regulate the banking system in India. The CRR is a percentage of total deposits that banks must hold as cash with the central bank, while the SLR is a percentage of total deposits that banks must hold as liquid assets such as government securities. The CRR is used to control the money supply in the economy and regulate inflation, while the SLR is used to ensure liquidity of banks. The liquid assets under SLR may give the bank an opportunity to covert the liquid assets into cash through the emergency liquidity window called Marginal Standing Facility.
