In the last article “ Banking Awareness Study Material : Policy Rates” , We have seen different RBI policy rates and how they can control the flow of money in the economy. In this article we will try to understand some other tools which help RBI to have a control over money in the economy.
We may have come across the term Reserve Ratios like CRR and SLR while reading some business articles, In general terms It is used to define the part of deposit which a bank must keep in the Central bank or buy Governmental Securities Bonds. It will become more clear when we will learn CRR and SLR.
There are two types of Reserve Ratios :-
1. CRR ( CASH RESERVE RATIO )
2. SLR ( STATUTORY LIQUIDITY RATIO )
CASH RESERVE RATIO
Cash Reserve Ratio can be defined as the part of the deposit which is mandatory for a bank to deposit in the RBI. Let us say a customer went to deposit Rs. 1000 to a bank. If the CRR is 4%, the bank will have to deposit Rs 40 to RBI. Let me ask you a question What happens if CRR is decreased by RBI. The answer is – Banks will have to deposit less amount to RBI i.e Banks will have more money to give to the customer as loan. As the money in the market will increase the loan interest will decrease. In this way RBI can control the flow of more money in the economy.
Here is an image ( SOURCE – Business Today) to understand CRR
STATUTORY LIQUIDITY RATIO
SLR is defined as the part of the deposit which a bank has to invest in some financial securities like Central Government or State Government Securities. Let us say the SLR is 20 %, It means the bank has to buy financial securities from government worth Rs 200. In this case the bank will receive some interest from the amount it is investing in RBI. When SLR is increased the bank will have to deposit more money in RBI and will earn more interest unlike CRR where no interests on the deposits are paid to the bank. But, It will reduce the amount of money which a bank can invest in the giving loan to the customer.
This image will give a clear picture of SLR ( image source – Business Today )
Latest Reserve Ratios SET BY RBI ( Dated 13th Nov, 207 )
- CRR = 4 %
- SLR = 19.5 %
I hope ” Banking Awareness Study Material : Reserve Ratios ” will help you in understanding Reserve Ratio which is very important from the all bank exams point of view. I will keep on covering more topics from Banking Awareness. In the next session I will be covering Banking Awareness study material: Types of Cheques. If you have not joined the IBPS Preparation group. Kindly Join and share your study material with us.