RBI being a central bank of India has the responsibility to control supply of money as well as cost of credit in India. In the process of controlling or managing money in India, RBI maintains Credit Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) of banks.
In this article, we will learn the meaning of Credit Reserve Ratio, Statutory Liquidity Ratio and the difference between these two ratios.
CRR or credit reserve ratio is a fixed percentage of the total deposit that a bank has to keep in the current account with RBI as liquid money. Balance left out after keeping this fixed percentage with RBI is allowed to lend to customers. Bank will not have access to the money that has been kept as CRR with RBI for any economic activity or commercial activity.
If a bank has total deposit of Rs. 200 crores and RBI has fixed the CRR or credit reserve ratio as 6% then the bank has to keep 6% of Rs. 200 crores in a current account with RBI. In our case Rs. 12 crores have to be kept with RBI as CRR. After keeping 12 crores as CRR or credit reserve ratio balance amount of Rs. 188 crore (i.e. 200-12) can be lend to customers as loan.
SLR or statutory liquidity ratio is also fixed by RBI. SLR is the amount that is invested specifically in certain securities of central government or state government. Similar to Credit Reserve Ratio, SLR is also fixed as a percentage on the total deposits of bank.
Like in our above example, if the SLR rate is 6% then 12 crore has to be invested in specified securities of central government or state government.
RBI has full right to increase or decrease the CRR or credit reserve ratio from time to time based on inflation and other economic conditions of our country. Similarly SLR can also be decreased or increased.
When RBI increases CRR or SLR, each bank in India are required to maintain the higher amount that is notified by RBI as their credit reserve ratio or statutory liquidity ratio. Similarly, if it decreases then the bank can reduce and give higher percentage of deposit to customer.
At recession RBI may decrease CRR rate to have more money in the hands of bank and ultimately available to public to lend. So, the money that is kept as CRR or invested as SLR remains blocked for statutory reason of the country.