Difference Between CRR and SLR

Updated on April 16, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

CRR vs SLR Differences

Cash Reserve Ratio (CRR) is a percentage of money to be kept by all the banks with the Reserve Bank of India in cash. Hence, it regulates the flow of money in the economy. In contrast, the Statutory Liquidity Ratio (SLR) is the time and demand liabilities of the bank, which are to be kept to maintain the bank’s solvency, where both affect the bank’s lending capacity.

Cash Reserve Ratio is the ratio of total deposit that banks need to keep as a reserve with RBI in cash. In contrast, the Statutory Liquidity Ratio is the compulsory ratio of the deposit that the bank maintains in the form of money, gold, and other securities prescribed by RBI. CRR and SLR are the basic tools in the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more that manage inflation and money flowMoney FlowMoney flow (MF) refers to a mathematical function used to analyze changes in the value of a security by multiplying its typical price by daily trading volume.read more in the country. RBI controls bank capacity of lending through them.

What is CRR?

RBI calculates the Cash Reserve ratio formulaCash Reserve Ratio FormulaCash Reserve Ratio refers to the share of a Bank’s total deposits that need to be maintained with the respective Country’s Central Bank to control financial supply in the economy. read more. CRR is the ratio of total deposit that banks need to keep as a reserve with RBI (Reserve Bank of India) in cash instead of keeping the amount with them. It is a powerful tool to control money flow in the market. If CRR is high, bank deposits with RBI increase, leading to a decrease in the bank’s capacity to lend. Hence, the interest rate increases as borrowing become expensive, and the market’s money flow decreases inflation. That is how the CRR ratio helps to reduce inflation. Whereas, when CRR decreases, bank deposit with RBI decreases, which leads to an increase in the bank’s capacity to lend. Hence, the interest rate decreases as borrowing become cheap, and the market flow increases inflation. Through this RBI control flow of money in the market, CRR also helps RBI handle inflation.

Shortly, if RBI wants to increase the flow of money in the market, it will reduce CRR. Whereas, if RBI wants to decrease money flow in the market, it will increase CRR.

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Example

If CRR is 5%, the bank has maintained ₹5 from the deposit of ₹100. On the other hand, If the bank has the assurance of ₹200 million, then the bank has to keep ₹10 million with RBI, i.e., 5% of the total ₹200 million, and utilize ₹190 million for lending.

CRR vs SLR

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What is SLR?

SSLR is the Statutory Liquidity RatioStatutory Liquidity RatioThe statutory liquidity ratio (SLR) is the minimum percentage of liquid assets that every commercial bank needs to retain. It acts as a reserve and comprises cash, securities, and gold.read more that RBI calculates. It is the compulsory ratio of the deposit that the bank maintains in the form of cash, gold, and other securities prescribed by RBI. In short, it is kept by the bank in for of liquid assetsLiquid AssetsLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company's balance sheet.read more. The purpose of maintaining SLR is that the bank can have an amount in the form of liquid assets to handle a sudden increase in demand from the depositor.

RBI uses it to limit credit facilitiesCredit FacilitiesCredit Facility is a pre-approved bank loan facility to businesses allowing them to borrow the capital amount as & when needed for their long-term/short-term requirements without having to re-apply for a loan each time. read more offered by the bank to borrowers, maintaining its stability. SLR is a percentage of the bank’s net time and demand liability. Here, time liability is the amount payable to the customer after an interval, and demand liability means the amount owed to the customer when he demands the same. SLR also protects the bank from a bank run situation and provides confidence to the customer in the banking system.

Example

Let SLR is 20%; then the bank has to retain ₹20 from the deposit of ₹100. Suppose the bank has a stake of ₹200 million, then the bank has to save ₹40 million, i.e., 20% of the total ₹200 million, and can use ₹160 million for banking purposes.

Video Explanation of CRR vs SLR

 

CRR vs SLR Infographics

CRR vs SLR Infographics

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Key Differences Between CRR and SLR

  • There is a difference in maintenance for CRR and SLR. The cash reserve ratio is maintained in cash. In contrast, the statutory liquidity ratio is held in cash, gold, and other securities prescribed by RBI.
  • CRR helps RBI control the money flow in the market, whereas the statutory liquidity ratio helps the bank handle a sudden increase in depositors’ demand
  • RBI maintains deposit maintenance in the cash reserve ratio, whereas the bank retains the statutory liquidity ratio.
  • A cash reserve ratio controls the liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more in the country’s economy, whereas SLR governs the country’s credit growth.
  • In the cash reserve ratio, banks do not earn any interest over the amount maintained at RBI, whereas one can earn interest on a deposit of SLR.

There are many similarities between SLR and CRR. Those are as follows:-

  • RBI decides the SLR and CRR.
  • SLR and CRR can affect inflation in the economy.
  • RBI made it mandatory for the bank to maintain the statutory liquidity ratio and cash reserve ratio.

Comparative Table

CRRSLR
CRR is the deposit banks’ ratio at RBI.SLR is the ratio of the deposit that the bank needs to keep with them.
CRR is held in the form of cash.SLR is held in gold, money, and other securities approved by RBI.
CRR helps to control the flow of money.SLR helps to meet the sudden demand of depositors.
CRR has to be maintained with RBI.SLR has to be supported by the bank.
CRR regulates liquidity in the economy.SLR regulates credit facilities.
Banks do not earn any interest on the amount deposited in CRR. Banks can earn interest on SLR.

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