(i) Cash Reserve Ratio (CRR)
CRR is the amount of reserve which banks have to keep it with Reserve Bank of India (RBI). The current CRR rate is 4%. So, CRR is basically a fraction of the total amount of deposits collected from the customers and kept as reserve either in cash or as deposits with the central bank. CRR is prescribed according to the guidelines of the central bank of a country.
The basic purpose is to ensure that banks do not run out of cash to meet the demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy.
Example :
A depositor deposits Rs. 10000 in a bank. Out of Rs. 10000, the bank keeps Rs. 400 as CRR. This works as a type of contingency fund to ward off any payment crises in future.
(ii) Statutory Liquidity Ratio (SLR)
SLR is the amount of reserve which banks have to keep it with themselves. Apart from Cash Reserve Ratio (CRR), banks have to maintain a certain portion of their deposits in the form of liquid assets like cash, gold and non-mortgaged securities.
Further, Banks which subscribe to Treasury bills, issued by RBI on behalf Government, qualifies their SLR requirements. There is a reporting Friday in which Banks have to report to the RBI every alternate Friday their SLR maintenance. If they fail to make such payments, they have to pay penalties for failing to maintain SLR as mandated. The current SLR is 20%.
Example :
Government comes out with a tax free bond worth Rs. 5000 crore, which RBI issues on behalf of the Government. State Bank of India subscribes Rs. 500 crore. This whole amount will qualify as SLR.
CRR is the amount of reserve which banks have to keep it with Reserve Bank of India (RBI). The current CRR rate is 4%. So, CRR is basically a fraction of the total amount of deposits collected from the customers and kept as reserve either in cash or as deposits with the central bank. CRR is prescribed according to the guidelines of the central bank of a country.
The basic purpose is to ensure that banks do not run out of cash to meet the demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy.
Example :
A depositor deposits Rs. 10000 in a bank. Out of Rs. 10000, the bank keeps Rs. 400 as CRR. This works as a type of contingency fund to ward off any payment crises in future.
(ii) Statutory Liquidity Ratio (SLR)
SLR is the amount of reserve which banks have to keep it with themselves. Apart from Cash Reserve Ratio (CRR), banks have to maintain a certain portion of their deposits in the form of liquid assets like cash, gold and non-mortgaged securities.
Further, Banks which subscribe to Treasury bills, issued by RBI on behalf Government, qualifies their SLR requirements. There is a reporting Friday in which Banks have to report to the RBI every alternate Friday their SLR maintenance. If they fail to make such payments, they have to pay penalties for failing to maintain SLR as mandated. The current SLR is 20%.
Example :
Government comes out with a tax free bond worth Rs. 5000 crore, which RBI issues on behalf of the Government. State Bank of India subscribes Rs. 500 crore. This whole amount will qualify as SLR.
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