CRR vs SLR

The interest rate that a bank charges to their borrowers varies; it does not remain the same. This is due to a number of reasons, such as:

Political gain during elections.
Delay by which borrowers spend money on consumer goods.
The lender might prefer to use the money in other investments rather than loan it.
The risk that the borrower will die suddenly, go bankrupt, or renege on paying his loan.
Taxes that are placed on profit from interests.
Liquidity preference.
Inflation, which can be influenced by a bank’s CRR and SLR.

In order to control the supply of money in an economy, the central bank of a country charges interest on advances and loans that it grants to commercial banks and other financial institutions. This is called a bank rate or a discount rate.
Bank rates stabilize the exchange rates and control inflation. Any changes in bank rates can affect every aspect of the economy. Take, for example, the case of how petroleum oil prices can affect bank rates. An increase in its price would mean higher interest rates on bank loans as well as personal loans of individual customers.

For the purpose of stabilizing a bank’s assets and interest rates, the central bank of a country requires that they keep a regulatory reserve of the deposits and notes made by customers instead of lending them all out. This required reserve affects how the purchasing power of money is maintained. The higher the requirement, the less money that banks can loan out leading to a lower amount of money created. The cash reserves that banks keep with the central bank is called the Cash Reserve Ratio (CRR).

A CRR requires only a cash reserve so a portion of the cash deposits that banks receive are kept with the central bank as a reserve. A decrease in the CRR would mean a higher amount of money that banks can lend generating more income for them. It controls the liquidity in the economy.

The Statutory Liquidity Ratio (SLR), on the other hand, is cash, precious metals, or certificates that a bank keeps with them as a reserve. It limits the influence that banks have on putting more money into the economy. An SLR guarantees the stability of banks and is used to limit the increase in bank credit. It controls the credit growth in the economy by curbing inflation and encouraging growth. It is also used to make banks invest more in government securities.

Summary

1.“CRR” stands for “Cash Reserve Ratio” while “SLR” stands for “Statutory Liquidity Ratio.”
2.A commercial bank’s CRR is maintained with the central bank while its SLR is maintained at the bank.
3.The SLR can be in the form of cash, precious metals like gold, or securities while a CRR can only be in the form of cash.
4.The CRR controls the liquidity in the economy and staves off inflation while the SLR controls the credit growth in the economy and limits the influence banks have in putting more money into the economy.
5.An SLR is intended to make banks invest in government securities while a CRR is intended to maintain the purchasing power of money in order to curb inflation.

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