Reserve Ratios

Introduction

• The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. 
• This is a requirement determined by the country’s central bank, which is the Reserve Bank of India (RBI). 
• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are the reserve rations.

Cash Reserve Ratio 

• The Cash Reserve Ratio (CRR) is the percentage of total deposits kept in cash with the Reserve Bank of India (RBI) by commercial banks. 
• Banks are not permitted to use this fund for commercial reasons, and the RBI does not pay interest on CRR balances held by banks.
• One of the main aims of CRR is to remove excess cash from the economy. 
• Cash Reserve Ratio (CRR) is determined by the RBI.

Statutory Liquidity Ratio

• It is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. 
• It is basically the reserve requirement that banks are expected to keep before offering credit to customers. These are not reserved with the Reserve Bank of India (RBI), but with banks themselves. 
• The SLR is fixed by the RBI. CRR (Cash Reserve Ratio) and SLR have been the traditional tools of the central bank’s monetary policy to control credit growth, flow of liquidity and inflation in the economy. 
• The SLR was prescribed by Section 24 (2A) of Banking Regulation Act, 1949. Liquid assets are assets that are readily converted into cash. For example, Gold, Government securities, etc. 
• SLR’s primary goal is to manage bank credit, ensuring that banks invest in government securities, and save banks from insolvency. 
• SLR is determined by the RBI.