Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) | Do you know what they are? You might already know this if you come from a financial background or have a serious interest in banking. If not, don’t panic; we’ll clear up any confusion you may have about these two crucial banking terms.
Overview of Indian Banking
Any economy relies on banks. It establishes the nation’s financial foundation and global presence. Nationalized banks regulate the Indian financial market. I’ll say it: RBI is the bank king. Indian central bank RBI.
It issues and distributes the Indian rupee and manages numerous monetary policies. RBI also sets bank regulations and policies. In banking regulation, the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are the most important ratios (SLR).
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Cash Reserve Ratio? Meaning
Section 42 of the RBI Act of 1934 mandates that all banks maintain a certain minimum balance with the RBI. The “Cash Reserve Ratio” (CRR) refers to this required minimum percentage. Banks can calculate their available capital for new investments and business transactions using CRR. This rate is used to drain excess cash from a country’s economy and regulate cash flow.
Typically, the CRR rate falls somewhere in the 3-to-20% range. The annual CRR rate has been set at 4% for 2019.
There is a 3% annual interest penalty on top of the applicable bank rate if a bank fails to comply with the CRR rules on a daily basis as required. If the shortfall persists on the following day(s), you’ll have to pay interest at a rate of 5% per year above the standard bank rate.
What is the Statutory liquidity ratio? Meaning
The amount of readily available cash that a bank must maintain at the close of business each day is known as the statutory liquidity ratio (SLR). The Reserve Requirement, or SLR, is a word used by the Indian government to refer to the cash, gold, or permitted securities that commercial banks in India must keep on hand. This reserve, which is typically in excess of CRR, can be used to assist depositors in the event of a spike in the demand for funds.
With RBI’s approval, the SLR rate can be increased to 40% of the total payment. The current SLR rate for 2019 is merely 19.25%.
SLR Formula or the statutory liquidity ratio
SLR is calculated as (Liquid Assets / (Demand + Time Liabilities)) 100%.
CRR and SLR infractions have penalties.
Daily noncompliance with the CRR and/or recommendations will result in a 3% per annum interest penalty on top of the standard bank rate. If such a deficit persists for an additional day(s), you’ll have to pay interest at the rate of 5% per year on top of whatever rate your bank charges.
When and how do CRR and SLR take effect?
A nation’s monetary policy is what defines and shapes the country’s monetary system. The Reserve Bank of India (RBI) plays a significant role in the monetary policies and reforms in India. The Reserve Bank of India (RBI) formulates policy in order to regulate and manage the circulation of money in the Indian economy. CRR and SLR play crucial roles in the inference of such policies.
Our economy’s reaction to CRR and SLR.
CRR is the minimum cash balance Indian banks must maintain. SLR is the bank’s actual liquid value for investment and funding. Hence, greater CRR and SLR rates diminish bank liquidity and vice versa.
The RBI decreases CRR to inject cash into the economy, giving the bank more funds to use. Banks offer low-interest loans because they have more cash. Businesses and industries receive several investment loans from banks. This encourages economic growth.
From another perspective, lower rates mean consumers have more cash, which boosts purchasing power. Inflation may occur when purchasing power exceeds supply.
When SLR and CRR are high, banks have less money for their operations, which raises interest rates and loan or financial investment costs. So, opening a factory or buying a house, vehicle, or bike is expensive. This may slow economic growth. Low cash flow reduces buying, which lowers inflation.
Hence, the economy should thrive while inflation is controlled. Rates must not hurt us financially.
I can’t conceive the statics and planning needed to balance our economy with such ratios. These ratios are crucial to the nation’s economic progress.
Differences Between CRR and SLR
Both ratios influence money mobility in a country and affect the economy, but they differ.
CRR vs. SLR differences:
1. What is the reserve ratio?
CRR refers to the actual cash reserve that must be kept separate from any other reserve ratios. SLR, on the other hand, refers to liquid reserves like cash, gold, or authorized securities.
2. Who keeps things in balance?
When it comes to SLR, the banks are in charge of calculating and maintaining the reserve balances. While banks deposit their cash reserves with the Reserve Bank of India (RBI), this is not the case with the cash reserve.
3. What is the return rate?
Reserved funds that are retained in SLR earn interest for the bank as long as they remain on deposit. CRR funds are placed with and held by RBI; as a result, CRR funds do not earn interest.
4. How does the reserve ratio affect our national economy?
In situations where there is an increase in monetary demand, SLR is used to rein in the bank’s ability to expand credit, whereas CRR impacts the actual liquidity (or control) of the funds in the economy.
Many important financial and economic indicators, including inflation rate, GDP, and economic growth, are based on a country’s CRR and SLR rates. As a result, I believe it is fair to argue that the CRR and SLR rates are the nerve center of all monetary policy deliberation.
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