What are SLR and CRR in Banking?
If you’ve ever wondered how banks in India manage their money or why the RBI tweaks certain rates. Now think of banks as big buckets of money. But they can’t just use all the money however they want. The RBI (Reserve Bank of India) puts some rules in place to make sure banks are safe and stable. Two of the most important rules are SLR and CRR in banking.
What is SLR?
SLR or Statutory Liquidity Ratio is the minimum percentage of deposits that a bank must keep in the form of liquid assets like gold, cash, or government-approved securities. For example, if you get ₹100 from depositors, you must set aside ₹18 (as per recent SLR of 18.00%) in secure, easy-to-sell assets.”
Imagine you run a small kirana store. Out of every ₹100 you earn, your family insists you keep ₹20 in your home locker as emergency cash or gold. You can’t spend it on new stock or lend it. That’s how SLR works for banks.
Let’s say SBI collects ₹10,000 crore in deposits. With an SLR of 18%, SBI has to set aside ₹1,800 crore in liquid assets like: Government bonds (like G-Secs), and Cash reserves Gold.
Example of SLR
If a bank has total deposits of ₹100 crore,
- A Statutory Liquidity Ratio requirement of 18%.
- Then the bank maintains ₹18 crore in the form of liquid assets such as gold, cash, or government-approved securities.
- So these assets are held by the bank itself.
- It helps ensure its solvency.
- As they have the ability to meet withdrawal demands.
| Requirement | Example amount | Form of Reserve | Held With |
| SLR | INR 18 Crore at 18% | Gold, Cash, or Government securities | The Bank |
Impact of SLR on the Economy
This is how SLR impacts the economy:
| When SLR is High | When SLR is Low |
| Banks lend less money to people and businesses. | Banks have more money to lend. |
| Slows down economic activity (used to control inflation). | Boost the economy by increasing spending and borrowing. |
| The stock market may fall due to tight liquidity. | The stock market often rises due to better liquidity. |
How does the SLR Work?
This is how SLR works:
- RBI sets the SLR rate: This is usually expressed as a percentage of a bank’s total deposits. It can go up or down depending on what the economy needs.
- Banks must follow it, no exceptions: SLR isn’t a suggestion, it’s mandatory. Every bank, whether it’s SBI or a small cooperative bank, has to comply.
- RBI checks compliance every two weeks: Every 15 days, RBI reviews if banks are meeting their SLR requirement.
- If a bank doesn’t maintain enough SLR, the RBI can impose penalties: That could mean fines or other restrictions. It’s like being pulled over for breaking a traffic rule.
What is CRR?
CRR or Cash Reserve Ratio is the percentage of a bank’s total deposits that it must keep with the RBI in cash form. So if a bank collects ₹100, and CRR is 4.5%, it has to deposit ₹4.50 with the RBI. No interest is earned on this.
Let’s say you work at a Pixa Hive job and earn ₹20,000 per day. Your boss says, “Keep ₹3000 with me, just in case you mess up. You won’t earn any interest on it.” That’s CRR.
For example, if ICICI Bank collects ₹10,000 crore in deposits, with CRR at 4.5%, it must deposit ₹450 crore with the RBI. This amount cannot be used to give loans or invest.
Example of CRR
With the same INR 100 crore in deposits,
- RBI set the DRR at 4%
- The bank must keep INR 4 crore as cash with the RBI.
- This amount cannot be used for lending or investment.
- It is kept solely with the central bank to regulate liquidity in the economy.
| Requirement | Example amount | Form of Reserve | Held With |
| CRR | INR 4 Crore at 4% | Only cash | RBI |
Impact of CRR on the Economy
This is how CRR impacts the economy:
| When CRR is High | When CRR is Low |
| Banks have less money to lend. | Banks have more money to lend. |
| Helps control inflation. | Helps boost growth. |
| Liquidity in the market goes down. | Liquidity in the market goes up. |
How does the CRR Work?
This is how CRR works:
- RBI sets the CRR rate: It decides what percentage of a bank's deposits must be kept aside as pure cash. This can change depending on whether the RBI wants to cool down or boost the economy.
- Banks deposit that cash with the RBI: They can't use this money for giving loans or making investments. It’s like money kept in a sealed locker, only the RBI holds the key.
- No interest is given on this money: That’s right. Even though banks park crores with the RBI, they don’t earn a single paisa in return.
- CRR helps control the flow of money in the economy: If the RBI raises CRR, banks have less money to lend, so the market slows down. And if the RBI lowers CRR, banks get more money to lend, which boosts economic activity.
Difference Between SLR and CRR in Banking
Here are the differences between SLR and CRR:
| Feature | SLR | CRR |
|---|---|---|
| Full Form | Statutory Liquidity Ratio | Cash Reserve Ratio |
| Where the money is kept | With the bank itself (in assets) | With RBI (in cash only) |
| Returns possible? | Yes (from govt. securities) | No (RBI pays no interest) |
| Purpose | Ensure liquidity, control inflation | Control liquidity in the market |
| Flexibility | Slightly flexible (banks invest) | Very rigid (pure cash with RBI) |
Also read: Why Banks Have Zero Promoter Holding?
Conclusion
In conclusion, CRR and SLR are tools. While CRR controls the cash flow in the system, SLR ensures the stability of the bank. So, CRR and SLR help maintain a balanced and robust financial system in India. We hope this blog on SLR and CRR in banking has been helpful to you.
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