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CRR and SLR Definition :- Learning part

February 20, 2012

Cash Reserve Ration (CRR Definition)
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It’s the low percentage of amount that each bank has got to deposit to the RBI. If RBI chooses to improve the portion of the, the accessible amount with all the banks boils down. RBI is using this way (increase of CRR rate), to drain out the excessive cash within the banks.
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With regard to Example:
Banking companies are required to keep a percentage of their deposits as cash, meaning that in the event you deposit Rs. 100/- in your bank, consequently bank cannot make use of the whole Rs. 100/- for lending or investment cause. They need to keep a part associated with the deposit as cash and may use just the remaining amount for lending/investment. This minimal percentage that is based on the central bank is referred to as Cash Reserve Ratio.


What is Statutory Liquidity Ratio (SLR Definition)
.
SLR (Statutory Liquidity Ratio) is the money a commercial bank needs to preserve in the form of cash, or gold or government authorized securities (Bonds) before providing credit to their own customers. SLR rate is decided by the RBI (Reserve Bank of India) as well as to control the expansion of bank credit.
The maximum limit of SLR is 40% and minimum limit of SLR is 24%. It’s 26 now. This limitation is added by RBI on banks to make funds available to customers on demand at your earliest convenience. Gold and G Secs (or Gilts) are included along with cash because the two are highly liquid and secure assets.
The RBI can increase the SLR to contain inflation, suck liquidity in the market, to tighten the measure to protect the customers’ money. In a growing economy banks would probably like to invest in stock market, not in G Secs or Gold as the latter would yield less returns. Another reason why is long term G Secs (or any bond) are sensitive to interest rate changes. But in an emerging economy interest change is a usual activity.
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