Statutory Liquidity Ratio and Cash Reserve Ratio

Statutory liquidity ratio (SLR) refers amount that the commercial banks require to maintain in the form of gold or Government approved securities before providing credit to the customers. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit.

It is determined as percentage of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand. 

SLR is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold,cash or other approved securities.Thus, we can say that it is ratio of cash and some other approved liabilities(deposits). It regulates the credit growth in India.

The main objectives for maintaining the SLR ratio are the following:

  • 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.

The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing or increasing the money supply in the system respectively

The maximum limit of SLR is 40% and minimum limit of SLR is 23% In India, Reserve Bank of India always determines the percentage of SLR.

Both CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of banks that they can pump in economy

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.