- Both these are reserves and it deals with the banking industry.
- In an economy, there is a fluctuation in the market like inflation, depression, recession, and recovery.
- Both these are the primary tools and we can say instruments by which a central bank of a country (RBI in India) manages the lending capacity and flow of the finance in the market.
- Reserves are maintained to keep the economic function smooth and easy.
Cash Reserve Ratio
- Cash reserve ratio is generally known as the CRR by short name.
- As per the Section 42 (1) of the Reserve Bank of India Act, 1934, the monetary banks hold a certain proportion of their Demand and Time Liabilities (DTL) with the central bank of a country.
- CRR is a reserve which is mandatory for any bank, so it must be kept with the central bank of a country.( For e.g. Reserve Bank Of India)
- A CRR is calculated by a specific percentage of the bank's net demand and time liabilities and it must be in the form of cash only.
- A CRR is not used by the banks and it is used by the central bank to control the liquidity in the market and regulate the flow of money in an economy.
- If in case, central bank reduces the CRR ratio, it will increase the flow of money in the market and if the CRR ratio increases, it will decrease the flow of money in the market.
- A money kept with the central bank as CRR earns no interest and it is maintained on a fortnightly basis.
- Currently, the Cash reserve ratio is 4% it means if a bank has to put Rs 4 out of Rs100 as a CRR with the central bank in the form of cash only.
- A commercial bank in India has a total deposit of Rs 45, 00,000 and the CRR rate is 4%. So, it has to put Rs 1,80,000 as CRR with the RBI and the remaining balance of RS 43,20,000 is used by the commercial bank for the lending purpose of a loan, investment etc.
Statutory Reserve Ratio
- A statutory Reserve Ratio is called as SLR by short name and it must be kept before starting to provide credit to the customers.
- An SLR is also mandatory for the commercial banks in the form of liquid assets it means assets which can be used to meet the demand of depositors An SLR is kept based on the certain percentage of net time and demand liabilities. Time liabilities means the amount of money payable to the client after some specific time while demand liabilities means a money payable to the client when it is demanded by the client.
- An SLR is kept to maintain the stability of banks through the credit limit which is given to the customers.
- It is in the form of liquid assets like precious metals (gold) or other approved securities, which a financial institution must maintain as reserves other than cash.
- Statutory Liquidity Ratio is fixed by a central bank of a country and maintained by banks in order to manage the expansion of bank credit.
- SLR rate = (liquid assets / (demand + time liabilities)) × 100%
- Currently, An SLR rate is 19.5% so, a commercial bank will keep RS 19.50 Rs out of every Rs100 deposit as SLR with the central bank.
- A commercial bank in India has a total deposit of Rs 45, 00,000 and the SLR rate is 19.5%. So, it has to put Rs 8, 77,500 as SLR with the RBI and the remaining balance of RS 36, 22,500 is used by the commercial bank.
Difference between CRR and SLR
- CRR is the percentage of money which the bank kept with the Central Bank of a country in the form of cash only.
- SLR is a certain percentage of bank's Net Time and Demand Liabilities in the form of liquid assets as specified by the central bank.
Form of reserve
- A CRR is kept in the form of cash only.
- An SLR is kept in the form of precious metals like gold and government securities.
Effect on the reserve
- CRR controls an excess flow of money into the economy.
- SLR helps to meet the unexpected demand of any depositor by selling SLR reserve.
To maintain with whom
- CRR is maintained with the central bank of a country.
- SLR is kept with the bank itself only.
- CRR controls the liquidity in the market.
- SLR controls the credit growth in the market.
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