CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) are monetary instruments employed by the Reserve Bank of India to regulate banking system liquidity and stability.
1) Definition:
CRR mandates banks to hold a specific percentage of their total deposits as cash reserves with the RBI.
SLR requires banks to maintain a percentage of their total deposits in liquid assets, such as cash, gold, or government securities, within their own vaults.
2) Purpose:
CRR enables the RBI to manage the money supply and safeguard against banks facing fund shortages during unexpected withdrawal demands.
SLR ensures bank solvency by mandating a minimum holding of liquid assets to cover liabilities.
Collectively, these ratios fortify the banking system by ensuring sufficient liquidity and fostering disciplined lending practices.