What are SLR and CRR?

SLR: Statutory liquidity ratio or SLR refers to the minimum percentage of deposits that needs to be maintained by commercial banks in the form of liquid assets, cash, gold, government securities, etc. SLR is essentially a portion of the bank’s Net Demand and Time Liabilities (NDTL) or total demand deposits and time-based deposits. The limit of SLR for commercial banks is decided by the central bank of the country (Reserve Bank of India or RBI in India) but the deposits are maintained by the respective banks themselves. However, the SLR cannot be used by the bank for lending. The deposits designated towards SLR are eligible for earning interests. This monetary policy of the RBI is aimed at ensuring the solvency of the banks or ensuring that the banks, at any point in time, can pay back their liabilities. This in turn ascertains that the depositor’s money is safe and helps in increasing their confidence in the bank. SLR is used to regulate inflation and maintain cash flow in the economy. When there is inflation, RBI increases the SLR to restrict the lending capacity of the bank. And when there is a need to infuse cash into the system, RBI reduces the SLR to help banks offer loans at better rates and improve borrowings.

CRR: Cash reserve ratio or CRR is a portion of a commercial bank’s total deposits that needs to be maintained at the central bank of the country (which is RBI in India). Just like SLR, the limit of CRR to be maintained is also determined by RBI. However, here the deposit is in the form of liquid cash and has to be kept in an account with the RBI.Banks are not allowed to utilise the CRR deposited for giving out loans or for other lending purposes. Apart from that, CRR deposits are also not eligible for earning interests. CRR helps in ensuring that the bank always has enough cash to disburse when depositors need it.The purpose of this monetary policy is to check inflation in the economy. When CRR is increased, the cash reserves of commercial banks are depleted which limits their lending capacity. This reduces borrowings and helps in controlling inflation.