Banking News

‘CRR’ and ‘SLR’: a tool for expansion and contraction of bank credit


Every commercial banks in India has to maintain reserves under statutory provisioning norms .The  change in SLR and CRRt either increases or decreases the money supply to commercial banks. This in turn affects lendable resource of banks. Therefore ups and downs of money supply to market caused due to variation of SLR and CRR  has direct impact on economy of the country. RBI uses Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)  as a tool  for the expansion or contraction of bank credit which has direct impact on the economy  upon the situation of  inflation or deflation.

Statutory Liquidity Ratio: The maintaining of liquid assets by the commercial banks at the rate fixed by RBI is called Statutory Liquidity Ratio regulation. SLR ensures the liquidity and solvency of banks which is fundamental for sound banking system. Every scheduled bank in India requires maintaining liquid assets in the form of cash, gold and unencumbered approved securities and value of   which shall not be less than 25 percent of demand and time liabilities of the bank. The implication of change in SLR is same as change in CRR in regulating the expansion of credit. SLR is a statutory provision under Section 24 of Banking Regulation Act 1949 and it is in addition Cash Reserve Ratio to be maintained by the bank. The SLR regulation  is binding on all the commercial banks in India.RBI is with the power to increase the SLR rate, as and when it desires to do so. An increase in SLR rate means that commercial bank shall have to invest more money in Government and other approved securities which depletes lendable source of the banks.

Cash reserve ratio: Cash reserve ratio is a statutory provision regulated by RBI under Section 42(1) of Reserve Bank of India Act 1934. Every scheduled bank in India requires to maintain average balance with Reserve Bank of India, which shall not be less than 3 percent of demand and time liabilities of the bank. This is a statutory provision,  binding on scheduled banks to maintain minimum balance at a rate decided by RBI from time to time. Apart from above minimum balance of Cash Reserve Ratio, RBI is empowered to increase it by notification up to 15 percent under the Act.  RBI tries to curb the inflation by increasing the CRR, wherein banks have to keep more balance with RBI, thus their lend-able resource depletes. The depleted lend-able resource of banks have direct effect on the economy. When banks lend less, the money supply in the economy becomes scarce, naturally demand  for  money goes up. The demand for more money due to increase in CRR by RBI along with other regulatory actions such as increasing SLR limit,bank rate, repo rate etc,  helps in  curbing the inflation. There will be vice versa effect when RBI cuts the CRR rate, to encourage bank lending, thereby more credits available to Industries and other entrepreneurs, thus accelerate the economic activities.   

 

Related articles: (i) How RBI monitors money circulations, (ii) Repo rate and reverse Repo rate,  (iii)  what is Marginal Standing Facility, (iv) what is bank rate?

 

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