You might have heard in news about the CRR and SLR rates, the rates which RBI announces often. CRR and SLR are tools RBI uses under monetary policy.
Cash Reserve Ratio (CRR)
Cash reserve Ratio (CRR) is the amount of Cash that the banks have to keep with RBI. This Ratio is basically to secure solvency of the bank and to drain out the excessive money from the banks.
For example, if you deposit Rs 100 in your bank, then bank can't use the entire Rs 100 for lending or investment purpose. They have to maintain a certain percentage of their deposits in the form of cash and can use only the remaining amount for lending/investment. This minimum percentage which is determined by the central bank is known as Cash Reserve Ratio.
Thus, when a bank's deposits increase by Rs 100, 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 or credit purpose.
Higher the CRR ratio is, lower will be the amount available with the banks for lending and investment purpose and vice versa.
RBI uses this tool to curb inflation and to control excessive liquidity in the market.
Statutory Liquidity Ratio (SLR)
Apart from keeping a portion of deposits with the RBI as cash, banks are also required to maintain a minimum percentage of their net demand and time liabilities with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio.
If you deposit Rs. 100/- in bank, CRR being 9% and SLR being 11%, then bank can use 100-9-11= Rs. 80/- for giving loan or for investment purpose.