CRR and SLR are the terms which are used in the context of banking. These both tools are used by the RBI in order to control inflation and growth of the country by controlling liquidity through these 2 tools. Though they both are used together by Reserve Bank of India in their monetary policy there are some differences between the two, given below are some of the differences between CRR and SLR –
- Full form of CRR is cash reserve ratio while full form of SLR is Statutory Liquidity Ratio.
- While CRR refers to cash which Indian banks have to maintain with the RBI, it is calculated on the basis of demand and time deposits. Whereas SLR refers to minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities, it is also calculated as a percentage of demand and time deposits.
- Example of CRR will be suppose if the CRR stipulated by the RBI is 5% then a bank with demand and time deposits of 100 crores will have to maintain 5 crore as cash balance with RBI. Example of SLR will be suppose if the SLR stipulated by RBI is 24% than bank which is having deposit of 100 crore will have to maintain minimum 24 crore in the form of either gold, cash or RBI approved securities. As one can see the implication of above 2 tools is that bank lending ability is reduced drastically because a bank which has 100 crore as deposit cannot lend more than 71 crore as reaming amount has to be kept for cash reserve ratio and statutory liquid ratio.
- Calculation of CRR is easier because it only involves cash aspect; however calculation of SLR is tricky because apart from cash it also involves gold the value of which keeps changing and approved securities which keeps changing because some banks keep reshuffling their investment portfolios.
- While CRR is used by RBI to regulate the liquidity as increasing the percentage will lower the liquidity available in the banking system which in turn will lower the lending capacity of financial institutions and vice versa. SLR is used by RBI for many purposes like increasing the investment in the government approved securities, inflation management and so on.