Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are two important regulatory tools used by central banks, such as the Reserve Bank of India (RBI), to control the money supply and ensure the stability of the financial system.
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These ratios are primarily used in India, but similar concepts exist in other countries as well.
**Cash Reserve Ratio (CRR):** CRR is the percentage of a bank’s total deposits that it must keep as reserves with the central bank (RBI in India) in the form of cash. It is a non-interest-bearing reserve, which means banks do not earn any interest on the amount they keep as CRR.
**Statutory Liquidity Ratio (SLR):** SLR is the percentage of a bank’s total deposits that it must maintain in the form of liquid assets like government securities, cash, or gold. SLR securities typically earn some interest, although it is generally lower than market rates.
Now, let’s discuss how changes in these ratios affect the availability of bank credit to business organizations:
**Increase in CRR:** When the central bank raises the CRR, it forces banks to hold a larger portion of their deposits in cash, reducing the funds available for lending. This decreases the availability of credit in the market, making it more expensive and harder for businesses to obtain loans.
**Decrease in CRR:** Conversely, when the central bank decreases the CRR, banks can lend out a larger portion of their deposits, increasing the availability of credit. This can make loans more accessible and cheaper for businesses.
**Increase in SLR:** An increase in the SLR requirement means that banks have to hold more funds in the form of low-yielding government securities. This reduces their capacity to lend money, impacting the availability and cost of credit for businesses.
**Decrease in SLR:** A reduction in SLR allows banks to hold fewer government securities and use a larger portion of their deposits for lending. This can increase the availability of credit and potentially reduce interest rates on loans for business organizations.
In summary, CRR and SLR are tools that central banks use to control the money supply and influence the availability and cost of credit. Changes in these ratios can have a direct impact on the amount of funds banks have available for lending, which, in turn, affects the availability and affordability of bank credit for businesses.