WHAT IS SLR? What is CRR?

What is BANK
RATE?, What are REPO AND REVERSE REPOs?
What is difference between CRR and SLR?
Click Here to Know the Latest CRR Rates SLR Rate, Bank Rate, Repo and
Reverse Repo Rates for Banks in India

What is Bank rate? Bank Rate is the rate at which central bank of the country (in India
it is RBI) allows finance to commercial banks. Bank Rate is a tool, which central bank
uses for short-term purposes. Any upward revision in Bank Rate by central bank is an
indication that banks should also increase deposit rates as well as Prime Lending Rate.
This any revision in the Bank rate indicates could mean more or less interest on your
deposits and also an increase or decrease in your EMI.

What is Bank Rate ? (For Non Bankers) : This is the rate at which central bank (RBI)
lends money to other banks or financial institutions. If the bank rate goes up, long-term
interest rates also tend to move up, and vice-versa. Thus, it can said that in case bank rate is
hiked, in all likelihood banks will hikes their own lending rates to ensure and they continue to
make a profit.

What is CRR? The Reserve Bank of India (Amendment) Bill, 2006 has been enacted
and has come into force with its gazette notification. Consequent upon amendment to sub-
Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary
stability in the country, can prescribe Cash Reserve Ratio (CRR) for scheduled banks
without any floor rate or ceiling rate. [Before the enactment of this amendment, in terms
of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled
banks between 3 per cent and 20 per cent of total of their demand and time liabilities].

RBI uses CRR either to drain excess liquidity or to release funds needed for the economy
from time to time. Increase in CRR means that banks have less funds available and money
is sucked out of circulation. Thus we can say that this serves duel purposes i.e. it not only
ensures that a portion of bank deposits is totally risk-free, but also enables RBI to control liquidity
in the system, and thereby, inflation by tying the hands of the banks in lending money.

What is CRR (For Non Bankers) : CRR means Cash Reserve Ratio. Banks in India
are required to hold a certain proportion of their deposits in the form of cash.
However, actually Banks don’t hold these as cash with themselves, but deposit such
case with Reserve Bank of India (RBI) / currency chests, which is considered as
equivlanet to holding cash with themselves.. This minimum ratio (that is the part of the
total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or
Cash Reserve Ratio. Thus, When a bank’s deposits increase by Rs100, and if the cash
reserve ratio is 9%, the banks will have to hold additional Rs 9 with RBI and Bank
will be able to use only Rs 91 for investments and lending / credit purpose. Therefore,
higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for
lending and investment. This power of RBI to reduce the lendable amount by
increasing the CRR, makes it an instrument in the hands of a central bank through
which it can control the amount that banks lend. Thus, it is a tool used by RBI to
control liquidity in the banking system.

What is SLR? Every bank is required to maintain at the close of business every day, a
minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form
of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand
and time liabilities is known as Statutory Liquidity Ratio (SLR).

SLR=L.A/(Demand+Time.L)…?

Present SLR is 24%. (reduced w.e.f. 8/11/2008, from earlier 25%) RBI is empowered to
increase this ratio up to 40%. An increase in SLR also restrict the bank’s leverage position to
pump more money into the economy.

What is SLR ? (For Non Bankers) : SLR stands for Statutory Liquidity Ratio. This
term is used by bankers and indicates the minimum percentage of deposits that the
bank has to maintain in form of gold, cash or other approved securities(bonds). Thus,
we can say that it is ratio of cash and some other approved to liabilities (deposits) It
regulates the credit growth in India.

What are Repo rate and Reverse Repo rate?

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the
banks. When the repo rate increases borrowing from RBI becomes more expensive.
Therefore, we can say that in case, RBI wants to make it more expensive for the banks to
borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to
borrow money, it reduces the repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with
the RBI. The RBI uses this tool when it feels there is too much money floating in the banking
system. An increase in the reverse repo rate means that the RBI will borrow money from the
banks at a higher rate of interest. As a result, banks would prefer to keep their money with the
RBI

Thus, we can conclude that Repo Rate signifies the rate at which liquidity is
injected in the banking system by RBI, whereas Reverse repo rate signifies the
rate at which the central bank absorbs liquidity from the banks.

Bank rate
6.00% (w.e.f. 29/04/2003)
 5.00%
Cash Reserve Ratio (CRR) ( w.e.f.
17/01/2009)

Statutory Liquidity Ratio 25%(w.e.f. Increased from 24%

which was continuing
(SLR) 07/11/2009) since. 08/11/2008

3.25% Reduced from 4%

which was
Reverse Repo Rate (w.e.f. continuing since.
(21/04/2009) 05/03/2009

4.75% Reduced from 5.00%

Repo Rate under LAF (w.e.f. which was continuing
21/04/2009) since 05/03/2009

BANK CREDIT
The borrowing capacity provided to an individual by the banking system, in the form
of credit or a loan. The total bank credit the individual has is the sum of the
borrowing capacity each lender bank provides to the individual.

Difference between SLR & CRR

SLR restricts the bank’s leverage in pumping more money into the economy. On the
other hand, CRR, or Cash Reserve Ratio, is the portion of deposits that the banks
have to maintain with the Central Bank.

The other difference is that to meet SLR, banks can use cash, gold or approved
securities whereas with CRR it has to be only cash. CRR is maintained in cash form
with RBI, whereas SLR is maintained in liquid form with banks themselves.

SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain
in the form of cash, or gold or govt. approved securities (Bonds) before providing
credit to its customers. SLR rate is determined and maintained by the RBI (Reserve
Bank of India) in order to control the expansion of bank credit.
What Does Prime Rate Mean?
The interest rate that commercial banks charge their most credit-worthy customers. Generally a
bank's best customers consist of large corporations. The prime interest rate, or prime lending
rate, is largely determined by the federal funds rate, which is the overnight rate which
banks lend to one another. The prime rate is also important for retail customers, as the prime
rate directly affects the lending rates which are available for mortgage, small business and
personal loans.

Investopedia explains Prime Rate

Default risk is the main determiner of the interest rate a bank will charge a borrower. Because a
bank's best customers have little chance of defaulting, the bank can charge them a rate that is
lower than the rate that would be charged to a customer who has a higher likelihood of defaulting
on a loan.

What Does Federal Funds Rate Mean?

The interest rate at which a depository institution lends immediately available funds (balances at
the Federal Reserve) to another depository institution overnight.

Investopedia explains Federal Funds Rate

This is what news reports are referring to when they talk about the Fed changing interest rates. In
fact, the FOMC sets a target for this rate, but not the actual rate itself (because it is determined by
the open market).

The Federal Reserve: Introduction

Most people are aware that there is a government body that acts as the guardian of the economy - an
economic sentinel who implements policies designed to keep the country operating smoothly. Unfortunately,
most investors do not understand how or why the government involves itself in the economy.

In the U.S., the answer lies in the role of the Federal Reserve, or simply, the Fed. The Fed is the gatekeeper
of the U.S. economy. It is the bank of the U.S. government and, as such, it regulates the nation's financial
institutions. The Fed watches over the world's largest economy and is, therefore, one of the most powerful
organizations on earth.

As an investor, it is essential to acquire a basic knowledge of the Federal Reserve System. The Fed dictates
economic and monetary policies that have profound impacts on individuals in the U.S. and around the world.