How CRR and SLR impact on bank credits?

How CRR and SLR impact on bank credits?


Every commercial bank 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 the variation of SLR and CRR  has the direct impact on the 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 a 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 the 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 the 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 deplete 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 maintaining 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 a 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 has the 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.   

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