Reserve Ratios, CRR and SLR
Cash Reserve Ratio :
- Under the Reserve Bank of India act, 1934 the RBI prescribes CRR for banks.
- CRR is used for liquidity management and as a monetary tool to regulate money supply.
- It is the portion of the bank deposits that a bank should keep with the RBI in cash form.
- CRR deposits earn no interest.
- Reserve Bank of India Amendment Act, 2006 provided that CRR can be 0-100% of bank deposits.
- CRR is a medium to short term liquidity management tool.
Statutory Liquidity Ratio (SLR) :
- Banks shall hold a percentage of their time (fixed deposits) and demand liabilities (savings and current accounts) in the form of RBI – approved liquid assets such as government securities, cash and gold.
- SLR strives to ensure that banks are able to meet the government’s funding needs in partial way.
- According to the Banking Regulation Act of 1949, SLR can range from 0 to 40% of the bank’s deposits.
- SLR is currently set at 18%.
- SLR is a long term liquidity management tool.
- SLR enables banks to earn money as much of it is invested in government securities.
- SLR securities are kept with the bank themselves.
Syllabus : Prelims; Economy
