• What is it?
  The Legal Reserve Ratio (LRR) is the total percentage of a bank’s Net Demand and Time Liabilities (NDTL) that it must keep as reserves. These reserves are held either as cash with the Reserve Bank of India (RBI) or as liquid assets like government securities or gold. Simply put, it’s the sum of two components: Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
  
• Why does it exist?
  • To ensure banks have enough funds to meet customer withdrawals.
  • To help RBI control the amount of money circulating in the economy (money supply).
    
    
• How does it work?
  Banks cannot lend out all the money they receive as deposits. A portion must be kept aside as reserves, which is determined by LRR. For example, if LRR is 22%, and a bank has deposits of ₹100 crore, it must keep ₹22 crore as reserves (CRR + SLR).
• Formula:
  LRR = CRR + SLR
• Significance:
  • Acts as a safety net for banks during financial crises.
  • Helps RBI manage inflation and economic growth by controlling how much money banks can lend.
  • Ensures banks remain financially stable and trustworthy.
• Example:
  If CRR is 4% and SLR is 18%, the LRR is 4% + 18% = 22%. This means 22% of a bank’s deposits cannot be lent out.

(B) Statutory Liquidity Ratio (SLR)

• What is it?
  SLR is the percentage of a bank’s Net Demand and Time Liabilities (NDTL) that must be kept in the form of liquid assets such as cash, gold, or government-approved securities (like treasury bills or bonds).
  Example: If SLR is 18% and a bank has ₹100 crore in deposits, it must keep ₹18 crore in liquid assets.
• Current Rate (as of July 2025):
  Approximately 18% (subject to periodic RBI updates; check latest RBI notifications for accuracy).
• Why does it exist?
  • To ensure banks have readily available liquid assets to meet sudden customer demands.
  • To encourage banks to invest in government securities, helping the government borrow money.
  • To control how much money banks can lend, thus managing money supply.
• How does it work?
  Banks must maintain these assets at all times, which can be quickly converted to cash if needed. This reduces the risk of banks running out of funds during emergencies.
• Significance:
  • Promotes financial discipline by ensuring banks have a buffer of liquid assets.
  • Supports government fiscal policy by creating demand for government securities.
  • Helps control inflation by limiting excessive lending.
• Impact of Changes:
  • High SLR: Less money for lending, which can slow economic growth but control inflation.
  • Low SLR: More money for lending, which can boost economic growth but may increase inflation.
• Example:
  If a bank’s NDTL is ₹500 crore and SLR is 18%, the bank must hold ₹90 crore in liquid assets (cash, gold, or securities).

(C) Cash Reserve Ratio (CRR)

• What is it?
  CRR is the percentage of a bank’s Net Demand and Time Liabilities (NDTL) that must be kept as cash with the RBI. This cash earns no interest for the bank.
  Example: If CRR is 4% and a bank has ₹100 crore in deposits, it must keep ₹4 crore with RBI.
• Current Rate (as of July 2025):
  Approximately 4% (subject to RBI updates; verify with latest RBI announcements).
• Why does it exist?
  • To ensure banks have enough cash to meet withdrawal demands.
  • To allow RBI to control money supply in the economy.
  • To act as a tool for monetary policy to manage inflation and liquidity.
• How does it work?
  Banks deposit the required CRR amount in their current account with RBI. This money cannot be used for lending or investment, reducing the funds available for loans.
• Significance:
  • Strengthens the banking system by ensuring liquidity.
  • Helps RBI control inflation (high CRR reduces money supply) or stimulate growth (low CRR increases money supply).
  • Acts as a direct tool for RBI to manage economic stability.
• Impact of Changes:
  • High CRR: Reduces lending capacity, controls inflation, but may slow economic activity.
  • Low CRR: Increases lending capacity, promotes growth, but may lead to inflation.
• Example:
  If a bank’s NDTL is ₹500 crore and CRR is 4%, the bank must maintain ₹20 crore as cash with RBI.

(D) Credit Deposit Ratio

• What is it?
  The Deposit Ratio is not a standard regulatory term like CRR or SLR but is often used to describe the proportion of a bank’s total deposits that are lent out or invested, or the ratio of deposits to other financial metrics. For exam purposes, it may refer to the Credit-Deposit Ratio (C-D Ratio), which measures the percentage of deposits a bank lends as credit.
  
  Formula:
  C-D Ratio = (Total Loans / Total Deposits) × 100
  Example: If a bank has ₹100 crore in deposits and gives ₹80 crore as loans, the C-D Ratio is (80/100) × 100 = 80%.
  
• Why does it matter?
  • Indicates how efficiently a bank is using its deposits to generate income through lending.
  • A high C-D Ratio means more deposits are being lent out, which can boost profits but increase risk.
  • A low C-D Ratio means the bank is holding more deposits as reserves, which is safer but less profitable.
• Significance:
  • Reflects a bank’s lending strategy and risk appetite.
  • Helps RBI monitor credit flow in the economy.
  • Affects economic growth, as higher lending supports businesses and consumers.
• Ideal Range:
  RBI prefers a C-D Ratio of around 75–80% for financial stability, but it varies by bank and economic conditions.
• Example:
  A bank with ₹1000 crore in deposits and ₹750 crore in loans has a C-D Ratio of (750/1000) × 100 = 75%.

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Tabular Comparison of LRR, SLR, CRR, and Deposit Ratio

Parameter	Legal Reserve Ratio (LRR)	Statutory Liquidity Ratio (SLR)	Cash Reserve Ratio (CRR)	Deposit Ratio (C-D Ratio)
Definition	Total reserves (CRR + SLR) a bank must hold against NDTL.	Percentage of NDTL held as liquid assets (cash, gold, securities).	Percentage of NDTL held as cash with RBI.	Ratio of loans to total deposits.
Purpose	Ensures liquidity and controls money supply.	Ensures liquidity and supports government borrowing.	Controls money supply and ensures cash availability.	Measures lending efficiency and credit flow.
Form of Reserve	Cash (CRR) + Liquid assets (SLR).	Cash, gold, government securities.	Cash only (with RBI).	Not a reserve; reflects lending activity.
Current Rate (2025)	CRR + SLR (e.g., 4% + 18% = 22%).	~18% (varies).	~4% (varies).	Not fixed; typically 75–80%.
Regulated by	RBI (sum of CRR and SLR).	RBI.	RBI.	Monitored by RBI, not directly regulated.
Impact on Lending	Reduces lending capacity.	Reduces lending capacity.	Reduces lending capacity.	High ratio means more lending.
Interest Earned	SLR assets may earn interest; CRR does not.	May earn interest (e.g., on securities).	No interest earned.	Not applicable (loans earn interest).
Example	NDTL ₹100 crore, LRR 22% = ₹22 crore.	NDTL ₹100 crore, SLR 18% = ₹18 crore.	NDTL ₹100 crore, CRR 4% = ₹4 crore.	Loans ₹80 crore, Deposits ₹100 crore = 80%.

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Probable Questions for Prelims

1. What is the Legal Reserve Ratio (LRR)?
   a) CRR only
   b) SLR only
   c) CRR + SLR
   d) Deposit Ratio
   
   Answer: c) CRR + SLR
   Explanation: LRR is the sum of CRR and SLR, representing the total reserves a bank must maintain.
   
2. What is the primary purpose of the Statutory Liquidity Ratio (SLR)?
   a) To control inflation
   b) To ensure banks invest in government securities
   c) To increase bank profits
   d) To reduce deposits
   
   Answer: b) To ensure banks invest in government securities
   Explanation: SLR ensures liquidity and supports government borrowing by mandating investment in liquid assets.
   
3. If CRR is increased by RBI, what is the likely impact?
   a) Increased lending by banks
   b) Reduced money supply
   c) Higher interest rates on deposits
   d) No impact on the economy
   
   Answer: b) Reduced money supply
   Explanation: Higher CRR reduces the funds available for lending, decreasing money supply.
4. What does a high Credit-Deposit Ratio indicate?
   a) Low lending activity
   b) High liquidity in banks
   c) Aggressive lending by banks
   d) Reduced deposits
   
   Answer: c) Aggressive lending by banks
   Explanation: A high C-D Ratio means a bank is lending a large portion of its deposits.
5. Which of the following earns no interest for banks?
   a) SLR assets
   b) CRR funds
   c) Government securities
   d) Gold reserves
   Answer: b) CRR funds
   Explanation: CRR funds are held as cash with RBI and earn no interest.

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Mains Questions and Model Answers

Q1: Discuss the role of CRR and SLR as tools of monetary policy in India. How do they impact the economy? (250 words)
Answer:
The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are critical monetary policy tools used by the Reserve Bank of India (RBI) to regulate liquidity, control inflation, and ensure financial stability. CRR mandates banks to maintain a percentage of their Net Demand and Time Liabilities (NDTL) as cash with RBI, currently around 4% (as of 2025). It directly controls money supply by limiting funds available for lending. A higher CRR reduces liquidity, curbing inflation but potentially slowing economic growth. Conversely, a lower CRR increases lending capacity, stimulating economic activity but risking inflation. SLR, currently around 18%, requires banks to hold liquid assets like cash, gold, or government securities. It ensures banks have a liquidity buffer for emergencies and supports government borrowing by creating demand for securities. A higher SLR restricts lending, controlling money supply, while a lower SLR boosts credit availability, promoting growth. Together, CRR and SLR form the Legal Reserve Ratio (LRR), determining the total reserves banks must maintain. These tools help RBI balance inflation and growth, maintain banking stability, and support fiscal policy. However, excessive increases in CRR or SLR can strain bank profitability, while sharp reductions may lead to overheating of the economy. Thus, CRR and SLR are pivotal in achieving macroeconomic stability, with their calibration reflecting RBI’s monetary policy stance—contractionary to control inflation or expansionary to spur growth. Q2: Explain the significance of the Credit-Deposit Ratio in assessing a bank’s performance. How does it relate to CRR and SLR? (200 words)
Answer:
The Credit-Deposit Ratio (C-D Ratio) measures the proportion of a bank’s total deposits lent out as loans, calculated as (Total Loans / Total Deposits) × 100. It is a key indicator of a bank’s lending efficiency and risk appetite. A high C-D Ratio (e.g., 80%) indicates aggressive lending, boosting profitability but increasing liquidity risks. A lower ratio (e.g., 60%) suggests conservative lending, ensuring safety but reducing income. RBI monitors the C-D Ratio to ensure balanced credit flow, with an ideal range of 75–80%. The C-D Ratio is influenced by CRR and SLR, which determine the funds banks must reserve. CRR requires banks to hold cash with RBI (e.g., 4%), while SLR mandates investment in liquid assets (e.g., 18%). Together, these form the Legal Reserve Ratio (LRR), reducing the funds available for lending. For instance, if LRR is 22%, only 78% of deposits can potentially be lent, impacting the C-D Ratio. A high CRR or SLR lowers the C-D Ratio by limiting lendable funds, while reductions increase it, enabling more lending. Thus, the C-D Ratio reflects how effectively banks balance regulatory requirements with lending to support economic growth while maintaining stability.