Cash Reserve ratio & Statutory Liquidity ratio [#3]

Cash Reserve ratio & Statutory Liquidity ratio

Cash reserve ratio and statutory liquidity ratio are two important reserve ratio of Central bank or Reserve Bank of India that help RBI to control the money supply and proper regulation of banking in India. These two reserve ratios are the instruments of monetary policy just like the Repo rate and reverse repo rate and are required to maintain by every scheduled bank in India. So what do these reserve ratios mean?

Cash Reserve ratio 

CRR (Cash reserve ratio) is the ratio of bank’s cash reserve with RBI with reference to their demand and time liabilities to make sure banks are always able to repay their customer's deposits and ensure the solvency of banks. Currently, CRR is 4% which means every scheduled bank has to keep 4% of their Net demand and time liabilities in cash with RBI and no interest will be interest on that CRR.

[*NDTL (Net demand and time liabilities) is the sum of demand and time Deposits/Liabilities of the bank after deducting deduction deposits with other banks.]

For Example, A bank has a total of Rs 100,000 deposits from their customer as a liability (Both types) then the bank that has to keep 4% of their deposits as cash reserve ratio which will be 4000 rupees so now bank can only give Rs 96,000 as a loan to people.

Statutory Liquidity ratio 

Not only Cash reserve ratio but commercial banks in India also have to maintain a reserve in the form of liquid assets like Liquid cash, gold reserve and any kind of asset that is easier to convert into cash and the rate/ratio at which banks have to keep liquid assets is called as Statutory Liquidity Ratio. And RBI uses this ratio to control the flow of money in the economy.

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