<<–2/”>a href=”https://exam.pscnotes.com/5653-2/”>p>CRR and SLR, covering the key differences, pros and cons, similarities, and frequently asked questions:
Introduction
In the realm of Banking and finance, the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are two critical tools that central banks (like the Reserve Bank of India) use to regulate the Money-supply-2/”>Money Supply, control Inflation, and ensure the stability of the financial system. Understanding how they work is essential for anyone interested in economics, finance, or banking.
Key Differences Between CRR and SLR
| Feature | Cash Reserve Ratio (CRR) | Statutory Liquidity Ratio (SLR) |
|---|---|---|
| Objective | Primarily controls liquidity in the Economy. | Ensures the solvency of banks and manages credit Growth. |
| Form | Held in the form of cash deposits with the central bank. | Held in cash, gold, and approved securities. |
| Maintenance | Maintained by banks with the central bank. | Maintained by banks themselves. |
| Interest | Banks do not earn interest on CRR deposits. | Banks can earn interest on SLR securities. |
| Impact | Directly impacts the amount of money banks can lend. | Indirectly influences lending by affecting the cost of funds. |
| Frequency of Change | Changed more frequently by the central bank. | Changed less frequently than CRR. |
Advantages and Disadvantages of CRR
| Advantages | Disadvantages |
|---|---|
| Effective tool for controlling inflation. | Can lead to a shortage of funds for lending. |
| Helps maintain the stability of the financial system. | May increase the cost of borrowing for businesses and individuals. |
| Ensures banks have enough cash to meet withdrawal demands. | Can reduce profitability for banks. |
Advantages and Disadvantages of SLR
| Advantages | Disadvantages |
|---|---|
| Promotes Investment in Government Securities. | Can restrict credit availability. |
| Enhances the safety and soundness of banks. | May reduce the liquidity of banks. |
| Helps government raise funds for development projects. | Can hinder economic growth if SLR is too high. |
Similarities Between CRR and SLR
- Both are regulated by the central bank.
- Both are used as instruments of Monetary Policy.
- Both aim to maintain the stability of the financial system.
- Both influence the amount of credit available in the economy.
FAQs on CRR and SLR
1. What is the difference between CRR and SLR?
CRR is the Percentage of deposits that banks must keep with the central bank in the form of cash. SLR is the percentage of deposits that banks must maintain in the form of cash, gold, and approved securities. CRR primarily controls liquidity, while SLR ensures solvency and manages credit growth.
2. Who sets the CRR and SLR rates?
The central bank of a country (like the Reserve Bank of India) sets the CRR and SLR rates.
3. How often do the CRR and SLR rates change?
CRR rates are typically changed more frequently than SLR rates. The central bank adjusts these rates based on the prevailing economic conditions and its monetary policy objectives.
4. What happens if a bank fails to maintain the CRR or SLR?
If a bank fails to maintain the required CRR or SLR, it may face penalties from the central bank. These penalties could include fines or restrictions on lending.
5. How do CRR and SLR affect the common man?
CRR and SLR indirectly affect the common man through their impact on interest rates and credit availability. When the central bank increases CRR or SLR, banks may have less money to lend, which can lead to higher interest rates and reduced credit availability. Conversely, a decrease in CRR or SLR may lead to lower interest rates and increased credit availability.
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