Statutory Liquidity Ratio (SLR):
Statutory Liquidity Ratio or SLR refers to the amount that all banks require maintaining in cash or in the form of Gold or approved securities. Here by approved securities we mean, bond and shares of different companies.
This Statutory Liquidity Ratio is determined as percentage of total demand and percentage of time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers on there anytime demand. The liabilities that the banks are liable to pay within one month's time, due to completion of maturity period, are also considered as time liabilities.
The present banking system is called a “fractional reserve banking systemâ€, as the banks are required to keep only a fraction of their deposit liabilities in the form of liquid cash with the central bank for ensuring safety and liquidity of deposits. The Cash Reserve Ratio (CRR) refers to this liquid cash that banks have to maintain with the Central Bank as a certain percentage of their demand and time liabilities. For example if the CRR is 10% then a bank with net demand and time deposits of Tk. 1,00,000 will have to deposit Tk. 10,000 with the Central Bank as liquid cash.
There are some reasons behind introducing Statutory Liquidity Ratio. The main objectives for maintaining the Statutory Liquidity Ratio are the following:
• Statutory Liquidity Ratio is maintained in order to control the expansion of Bank Credit. By changing the level of Statutory Liquidity Ratio, central bank can increase or decrease bank credit expansion.
• Statutory Liquidity Ratio in a way ensures the solvency of commercial banks.
• By determining Statutory Liquidity Ratio, central Bank, in a way, compels the commercial banks to invest in government securities like government bonds.
Cash Reserve Ratio
Cash Reserve Ratio determines the amount that the banks should hold in cash, before deciding on their volume of credit. The level of Cash Reserve Ratio is fixed by the Central Bank of the country. The Central Banks can control the money supply of the country by changing the level of Cash Reserve Ratio.
Cash Reserve Ratio refers to that part of the Depositor's Balance that the commercial banks should necessarily hold in their hands in form of cash. The commercial banks can decide on the total volume of credit to be provided to the customers, only after maintaining the required level of Cash Reserve Ratio. In abbreviated form, this Cash Reserve Ratio is referred as CRR.
The Cash Reserve Ratio, which is expressed as a percent, varies from time to time. The required level of Cash Reserve Ratio is generally determined by the Central Bank of the Country. For example, in USA, the Federal Reserve of US determines the Cash Reserve Ratio. In India, Reserve Bank of India fixes the required level of Cash Reserve Ratio.
If the Central Bank fixes the level of Cash Reserve Ratio at 11%, then it means that, all the banks have to keep 11% of their Depositor's Money with them in the form of cash. This in a way ensures the solvency of banks. All the banks use their Depositor's money in providing credit and they try to expand the volume of bank credit as much as possible in order to generate higher profit. In such a situation, the Cash Reserve Ratio compels the banks to keep a particular part of the Depositor's Money with them so that, they can pay the customers on their anytime demand.
As the Cash Reserve Ratio controls the banks' volume of credit, it can be easily understood that, the level of Cash Reserve Ratio affects the money supply of any country. For this reason, Central Bank of any country can control the money supply in the economy by changing the level of Cash Reserve Ratio.
