CRR and SLR

1. Why reserve requirements exist#

Banks do not keep every rupee of deposits idle.

They use deposits and other funding to:

• make loans;
• buy securities;
• meet withdrawals;
• settle payments; and
• maintain liquidity.

Reserve and liquidity requirements place minimum constraints on this balance-sheet structure.

The two classic Indian Banking Awareness terms are:

• Cash Reserve Ratio - CRR
• Statutory Liquidity Ratio - SLR

They are related but very different.

2. Cash Reserve Ratio - CRR#

CRR is the prescribed proportion of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained as cash balance with RBI.

The current ratio is notified by RBI and can change.

Key characteristics#

CRR:

• is linked to NDTL;
• is maintained with RBI;
• is a cash reserve;
• affects the amount of funds available to banks; and
• is a powerful liquidity instrument.

3. What is NDTL?#

NDTL stands for:

Net Demand and Time Liabilities

A bank's liabilities include deposits and other obligations.

Demand liabilities#

Generally payable on demand.

Examples can include:

• current deposits;
• demand portion of savings deposits; and
• certain other immediately payable liabilities.

Time liabilities#

Payable after a specified period.

Examples include:

• fixed deposits;
• time portion of savings deposits; and
• other term liabilities.

The exact regulatory computation is technical.

For Banking Awareness, the important idea is:

CRR and SLR are calculated with reference to the bank's prescribed demand-and-time-liability base.

4. Example of CRR#

Suppose a bank's relevant NDTL for a simplified example is:

₹1,000 crore

and CRR is:

3%.

Required CRR balance:

₹1,000 crore × 3%

= ₹30 crore.

That ₹30 crore must be maintained with RBI according to the applicable rules.

5. Does RBI pay interest on CRR?#

Banks do not receive interest on the required CRR balance.

This creates an opportunity cost because those funds cannot be deployed into loans or interest-earning securities.

6. What happens when CRR rises?#

All else equal:

CRR rises → more cash must be kept with RBI → less deployable bank liquidity.

This can:

• tighten liquidity;
• reduce lendable resources;
• put upward pressure on money-market/funding conditions; and
• reinforce monetary tightening.

7. What happens when CRR falls?#

All else equal:

CRR falls → less cash locked with RBI → more liquidity released to banks.

This can:

• increase deployable funds;
• ease liquidity;
• support credit; and
• improve banks' ability to meet funding needs.

But it does not force banks to lend.

Banks still consider:

• credit demand;
• borrower quality;
• capital;
• risk;
• funding costs; and
• economic conditions.

8. CRR as a liquidity tool vs repo rate as a price tool#

A useful distinction:

Repo rate#

Changes the price of central-bank liquidity / policy signal.

CRR#

Changes the quantity of reserve balances banks must maintain.

This is why repo is often described as a price instrument and CRR as a quantity/liquidity instrument.

9. Statutory Liquidity Ratio - SLR#

SLR is the prescribed proportion of a bank's demand and time liabilities that must be maintained in specified liquid assets.

These can include assets such as:

• cash;
• gold; and
• unencumbered approved securities, especially Government securities,

subject to the regulatory framework.

Unlike CRR:

SLR assets are generally maintained by the bank itself rather than as a cash balance with RBI.

10. Example of SLR#

Suppose relevant liabilities are:

₹1,000 crore

and SLR is:

18%.

The bank must maintain:

₹180 crore

in eligible liquid assets under the applicable SLR framework.

This is conceptually different from maintaining ₹30 crore cash with RBI under a 3% CRR.

11. Why does SLR exist?#

SLR supports:

• liquidity;
• a minimum buffer of liquid assets;
• banking-system resilience; and
• historically, monetary/credit-management objectives.

Government securities form an important part of SLR holdings.

12. CRR vs SLR - master comparison#

13. Do CRR and SLR add together mechanically?#

Students sometimes calculate:

CRR + SLR = "total money permanently blocked".

That is too simplistic.

CRR and SLR differ in:

• asset type;
• location;
• return;
• regulatory treatment; and
• operational purpose.

SLR Government securities remain assets of the bank and may be usable in permitted liquidity operations.

CRR is a cash balance with RBI.

So adding the percentages does not tell you a bank's true "unlendable" share.

14. CRR vs cash kept in branch vaults#

Cash physically held in:

• branch counters;
• ATMs; or
• bank vaults

is not automatically the same as CRR.

CRR is a regulatory reserve balance maintained with RBI under the CRR framework.

15. SLR vs Government securities portfolio#

Banks can hold Government securities for many reasons:

• SLR compliance;
• liquidity management;
• investment;
• treasury operations;
• collateral; and
• market-making.

Therefore:

Not every Government security held by a bank exists only because of SLR.

16. CRR and liquidity cycles#

CRR changes can release or absorb durable banking-system liquidity.

For example:

a 100-basis-point CRR reduction frees a larger quantity of reserve balances than a small overnight fine-tuning operation.

This is why CRR is often used when RBI wants to make a durable adjustment to system liquidity.

17. Reserve requirements and monetary transmission#

Suppose RBI cuts repo but banking-system liquidity is extremely tight.

Transmission may be weaker.

If RBI simultaneously ensures sufficient liquidity, banks may find it easier to transmit lower policy rates.

Conversely, a CRR increase can reinforce tightening.

Monetary policy therefore involves both:

• interest-rate signals; and
• liquidity conditions.

18. Current-value discipline#

CRR and SLR are classic examples of:

Evergreen concept + Current Update

Students should permanently learn:

• what CRR means;
• what SLR means;
• how they differ; and
• how changes affect liquidity.

The actual percentage should come from current RBI data.

Quick check - BA-04-03#

1. Where is CRR maintained?
2. What type of assets are used for SLR?
3. Does the required CRR balance earn interest?
4. What is the usual liquidity effect of a CRR cut?
5. Is SLR maintained as a cash balance with RBI?
6. Why is it misleading simply to add CRR and SLR and call the total "blocked money"?

Quick answers#

1. With RBI.
2. Prescribed liquid assets such as cash, gold and eligible unencumbered approved securities.
3. No.
4. It releases banking-system liquidity.
5. No; SLR assets are maintained by the bank under the prescribed framework.
6. Because CRR and SLR differ in asset type, location, return and usability.