What is CRR(Cash Reserve Ratio)? What is SRR(Statutory Liquidity Ratio)?
Difference between SLR(Statutory Liquidity Ratio) and CRR(Cash Reserve Ratio),
What are liabilities of Bank? Difference between Demand Liabilities and Time
Liabilities. Objectives of maintaining SLR
Cash Reserve
Ratio(CRR):
The RBI act, 1934 stipulates that a
commercial bank is required to keep a certain percentage of its total deposits
with the RBI in cash. For example,
if you deposit Rs 100 in your bank, then bank can't use the entire Rs 100 for
lending or investment purpose. They have to maintain a certain percentage of
their deposits in the form of cash and can use only the remaining amount for
lending / investment. RBI uses this tool to curb inflation and to control
excessive liquidity in the market. When the ratio is raised it is called a
policy of credit squeeze and when it is lowered it is called credit liberalization.
It is also called as Variable Reserve Ratio. Traditionally, the amount held to
cater to the CRR requirement was stipulated to be no lower than 3 percent and
no higher than 20 percent of the total NDTL held in India. However, the RBI
(amendment) Act, 2006 provides for removal of the floor and ceiling with
respect to setting the CRR and authorizes the RBI to set the ratio in keeping
with the broad objective of maintaining monetary stability in the economy.
Statutory
Liquidity Ratio(SLR):
Apart from keeping a portion of deposits
with the RBI as cash, banks are also required to maintain a minimum percentage
of their net demand and time liabilities with them at the end of every business
day, in the form of gold, cash, government bonds or other approved securities.
This minimum percentage is called Statutory Liquidity Ratio. The maximum limit
of SLR is 40% and minimum limit of SLR is 23% In India.
Main
objectives for maintaining the SLR ratio are:
*To control the expansion of bank credit. By
changing the level of SLR, the Reserve Bank of India can increase or decrease
bank credit expansion.
*To ensure the solvency of commercial banks.
*To compel the commercial banks to invest in
government securities like government bonds.
If any Indian bank fails to maintain the required level
of Statutory Liquidity Ratio, then it becomes liable to pay penalty to Reserve
Bank of India
Note:
If you deposit Rs. 100/- in bank, CRR being 9% and SLR being 11%, then bank can
use 100-9-11= Rs. 80/- for giving loan or for investment purpose.
Difference
between SLR and CRR
Both CRR and SLR are instruments in the hands of RBI to
regulate money supply in the hands of banks.
· *SLR restricts the bank’s leverage in pumping
more money into the economy. On the other hand, CRR, or cash reserve ratio,
is the portion of deposits that the banks have to maintain with the Central
Bank to reduce liquidity in banking system. Thus CRR controls liquidity in
banking system while SLR regulates credit growth in the country.
· *The other difference is that to meet SLR,
banks can use cash, gold or approved securities whereas with CRR it has to be
only cash. CRR is maintained in cash form with central bank, whereas SLR is
money deposited in govt. securities. CRR is used to control inflation.
Liabilities of
Bank:
Demand
Liabilities of a bank are liabilities which are payable
on demand. These include current deposits, demand liabilities portion of
savings bank deposits, margins held against letters of credit/guarantees,
balances in overdue fixed deposits, cash certificates and cumulative/recurring
deposits, outstanding Telegraphic Transfers (TTs), Mail Transfers (MTs), Demand
Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account
and deposits held as security for advances which are payable on demand. Money
at Call and Short Notice from outside the Banking System should be shown
against liability to others.
Time
Liabilities of a bank are those which are payable
otherwise than on demand. These include fixed deposits, cash certificates,
cumulative and recurring deposits, time liabilities portion of savings bank
deposits, staff security deposits, margin held against letters of credit, if
not payable on demand, deposits held as securities for advances which are not
payable on demand and Gold deposits.
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