SLR & CRR and Casa

What does a reduction in SLR mean?
Dear readers, As you know Reserve Bank of India has released Second Bi-Monthly
Monetary Policy Statement and cut SLR by 50 basis points. So here we are posting a
post on SLR which will give you knowledge and also provide basic information on
SLR.
SLR (Statutory Liquidity Ratio): SLR is the amount a commercial banks 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 RBI in order to control the expansion of the bank
credit.
The maximum limit of SLR is 40%
As on 3rd June 2014 RBI release Second Bi-Monthly Monetary Policy Statement and cut SLR by
50 basis points, now current SLR is 22.5%, earlier it was 23%.
Note: Basis points: It is the increase in interest rates in percentage terms. For instance, if the
interest rate increases by 50 basis points (bsp), then it means that interest rate has been
increase by 0.50%.
One percentage point is broken down into 100 basis points. Therefore, an increase from 2% to
3% is an increase of one percentage point or 100 basis points.
The main objectives for maintaining the SLR ratio are the following:
i. to control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of
India can increase or decrease bank credit expansion.
ii. to ensure the solvency of commercial banks.
iii. to compel the commercial banks to invest in government securities like government bonds.
Main use of SLR:
SLR is used to control inflation and propel growth. Through SLR rate the money supply in the
system can be controlled effectively.
What is the difference between SLR and CRR?
What SLR does is it 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 RBI. Higher the ratio, the lower is the amount that banks will be able to use for
lending and investment.
The other difference is that to meet SLR, banks can use cash , gold or approved securities
where as with CRR it has to be only cash. CRR is maintained in cash form with RBI, where as
SLR is maintained in liquid form with banks themselves.
What does a reduction in SLR mean?

A cut in SLR means that the home, car and commercial loan rates will go down. Banks will
have more money with them. With the reduction of SLR, the RBI is shrinking the market for
government securities and simultaneously enlarging availability of credit to the private sector.
With that, the cost of funds to the government will increase and the rate charged by banks to the
private sector decreases.
Casa Ratio: Casa is basically the current and savings account deposits. The CASA
ratio shows how much deposit a bank has in the form of current and saving account
deposits in the total deposit.
If the CASA ratio is higher than it means that a higher portion of the deposits have come
from current and savings deposit.
This means that the bank is getting money at low cost, since no interest is paid on the
current accounts and the interest paid on savings account is usually low.
Current and Saving Accounts are demand deposits and therefore pay lower interest
rates compared to term deposits where the rates are higher.
In India, interest rates paid on current and savings account deposits is administered by
banking regulator - the Reserve Bank of India.
Why are banks keen on gained a higher share of CASA?
Interest rate paid on Casa is much lower compared to other deposits like term deposits
or recurring deposits. While banks do not pay any interest on current account, interest
paid on savings account deposit is 4%.
Banks therefore make maximum effort to increase the share of Casa on their books to
reduce their overall cost of deposits. HDFC Bank has the highest share of Casa to total
deposits at 52%, followed by the State Bank of India at 48% and ICICI Bank at 45%.
What does Casa mean for customers?
Recently interest paid on savings account deposits is 4%. Banks pay interest on
savings deposits on a daily basis rather than paying on the minimum balance
maintained by them in six months.
As a result, savings account customers earn better returns compared to what they
earned a year ago.
Further, interest earned on savings account deposits does not attract TDS (tax
deduction at source). Interest income above 10,000 a year attracts TDS of 10% in case
of term deposits. However, there is no major benefit for current account deposits, which
is mainly maintained by corporates and traders.
What are the disadvantages of high CASA?
These deposits can move out of banks' books anytime, leading to asset-liability
mismatches. While in case of term deposits, banks are almost certain that the depositor
may not withdraw money before the maturity of the deposit and may also renew the
deposit on maturity.
Further, to finance long-term projects, banks need to have long-term liabilities on their
books to avoid mismatches. Banks cannot rely on Casa deposits to fund long-term
loans .

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What does a reduction in SLR mean?

What does a reduction in SLR mean?

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