top of page

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

Updated: May 3, 2023

Cash Reserve Ratio (CRR) vs Statutory Liquidity Ratio (SLR)


Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are both monetary policy tools used by central banks to regulate the money supply in an economy. However, there are some key differences between the two:

  1. Definition: The Cash Reserve Ratio (CRR) is the percentage of deposits that commercial banks are required to keep with the central bank in the form of cash reserves. On the other hand, the Statutory Liquidity Ratio (SLR) is the percentage of deposits that commercial banks are required to maintain in the form of liquid assets such as cash, government securities, and other approved securities.

  2. Purpose: The purpose of CRR is to ensure that banks have sufficient cash reserves to meet their depositors' demands for withdrawals. The purpose of SLR is to ensure that banks have sufficient liquid assets to meet their obligations towards their depositors.

  3. Control over the money supply: The CRR directly affects the money supply as it reduces the amount of money that commercial banks can lend out. On the other hand, SLR indirectly affects the money supply as it determines the amount of funds that commercial banks can invest in government securities and other approved securities, which in turn can impact the amount of money available for lending.

  4. Rate of Interest: Banks do not earn any interest on the cash reserve held with the central bank, while banks earn interest on the SLR investments they make in government securities.

  5. Calculation: The CRR is calculated on the basis of banks' total deposits, while the SLR is calculated on the basis of banks' net demand and time liabilities.

In summary, the key difference between CRR and SLR is that CRR is a requirement for commercial banks to hold cash reserves with the central bank while SLR is a requirement for commercial banks to maintain a certain percentage of their deposits in the form of liquid assets such as cash and government securities.


Key differences between Cash Reserve Ratio(CRR) and Statutory Liquidity Ratio(SLR)


The key differences between CRR and SLR are in their definition, purpose, control over the money supply, rate of interest, and calculation. CRR is a requirement for commercial banks to hold cash reserves with the Central Bank, while SLR is a requirement for commercial banks to maintain a certain percentage of their deposits in the form of liquid assets. CRR directly affects the money supply by reducing the amount of funds that commercial banks can lend, whereas SLR indirectly affects the money supply by determining the amount of funds that commercial banks can invest in government securities and other approved securities.


Another key difference is the rate of interest. Commercial banks do not earn any interest on the funds held as cash reserves under CRR. In contrast, commercial banks can earn interest on the funds held as liquid assets under SLR. Additionally, the calculation of CRR is based on the total deposits of a bank, while the calculation of SLR is based on a bank's net demand and time liabilities.


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


While there are several differences between CRR and SLR, they also have several similarities. Both CRR and SLR are monetary policy tools used by the Central Bank of a country to regulate the money supply. They are also used to ensure that commercial banks maintain a certain level of liquidity to meet their obligations towards their depositors. Furthermore, both CRR and SLR are applicable to commercial banks.


Impact of change in Cash Reserve Ratio(CRR) and Statutory Liquidity Ratio(SLR) on the economy


Changes in CRR and SLR can have significant impacts on the economy of a country. For instance, an increase in CRR or SLR would lead to a reduction in the amount of funds available for lending and investment by commercial banks, leading to a decrease in the money supply. Conversely, a decrease in CRR or SLR would lead to an increase in the money supply.


A change in CRR or SLR can also impact interest rates in the economy. An increase in CRR or SLR would lead to an increase in the cost of funds for commercial banks, leading to an increase in lending rates. On the other hand, a decrease in CRR or SLR would lead to a decrease in the cost of funds for commercial banks, leading to a decrease in lending rates.


Moreover, changes in CRR and SLR can also impact the stability of the banking system. A high CRR or SLR would lead to a lower level of liquidity for commercial banks, which could impact their ability to meet their obligations towards their depositors. Conversely, a low CRR or SLR could lead to excessive lending and investment by commercial banks, which could lead to instability in the banking system.




Comments


bottom of page