💧 Liquidity Management Policy
Understanding CRR, SLR, exemptions, and impacts on liquidity.
Cash Reserve Ratio (CRR)
- Legal provisions: Section 42 (1) of RBI Act.
- Rate: Min (floor) & Max (ceiling) decided by RBI (no statutory floor or ceiling) as % of NDTL as on last Friday of 2nd preceding fortnight. Previously limits were 3%–20%, but RBI Act was amended to give RBI complete discretion.
- How maintained: As average fortnightly balance on reporting Friday.
- Where maintained: In a current account with RBI.
- Min daily balance: Min 90% of average fortnightly balance — banks don't need the exact average every day, but must not fall below 90% of required average on any given day.
- Interest: No interest w.e.f. fortnight ended 31st Mar 2007.
- Default in maintaining CRR: Bank to pay interest to RBI at bank rate + 3% pa for 1st day and subsequently, bank rate + 5% pa for 2nd day onward for default period and amount.
- Return: Form A (Fortnightly — provisional within 7 days, final within 20 days).
- Change impact: Reduction increases bank liquidity & vice versa.
Example: If and , the Average balance required .
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Cash Reserve Ratio (CRR)
- Legal provisions: Section 42 (1) of RBI Act.
- Rate: Min (floor) & Max (ceiling) decided by RBI (no statutory floor or ceiling) as % of NDTL as on last Friday of 2nd preceding fortnight. Previously limits were 3%–20%, but RBI Act was amended to give RBI complete discretion.
- How maintained: As average fortnightly balance on reporting Friday.
- Where maintained: In a current account with RBI.
- Min daily balance: Min 90% of average fortnightly balance — banks don't need the exact average every day, but must not fall below 90% of required average on any given day.
- Interest: No interest w.e.f. fortnight ended 31st Mar 2007.
- Default in maintaining CRR: Bank to pay interest to RBI at bank rate + 3% pa for 1st day and subsequently, bank rate + 5% pa for 2nd day onward for default period and amount.
- Return: Form A (Fortnightly — provisional within 7 days, final within 20 days).
- Change impact: Reduction increases bank liquidity & vice versa.
Example: If and , the Average balance required .
Major Demand and Time Liabilities for CRR
Major Liabilities Exempted from Calculation of NDTL:
- Paid up capital and Reserves & surplus.
- Borrowing or refinance from RBI and apex institutions such as NABARD, NHB etc.
- No. of other small items.
Liabilities Excluded from Calculation of CRR:
These are excluded to prevent double-counting of reserves within the banking system and to encourage specific refinancing.
a. Liabilities to the banking system. b. Credit balance in ACU account. c. DTL in respect of off-shore banking units. d. Inter-bank term deposit up to 1 year maturity. e. Incremental Auto & Home, MSME Loans given wef 14.2.20 to 31.7.20, exempted for 5 years. f. New MSME borrowers who did not avail any loan till 1.1.2021, shall be excluded for loans up Rs.25 lac disbursed till 31.12.21, for 1 year.
Statutory Liquidity Ratio (SLR)
- Legal provisions: Section 24 of B R Act.
- Rate: RBI can fix up to 40% (Max) of NDTL — no minimum statutory floor. Section 24 of BR Act caps SLR at 40% but sets no statutory minimum. NDTL as on last Friday of 2nd preceding fortnight (same as CRR).
- Form of SLR investments (maintained as specified assets — unlike CRR which is cash only):
- cash balance
- balance with other banks and excess CRR balance with RBI
- investment in gold / gold bonds (subject to some conditions)
- investment in unencumbered approved securities (govt. securities / trustee securities including purchase under LAF).
- Default in maintaining SLR: Interest payment as in CRR.
- SLR return: Form VIII by the 20th of every month.
- Impact of change: Reduction frees funds from investment, which can be used for lending purpose (and vice versa).
Summary Cheat Sheet
| Concept / Topic | Key Details / Explanation |
|---|---|
| CRR — Legal Provision | Section 42(1) of RBI Act |
| CRR — Rate | Min & Max decided by RBI (no statutory floor or ceiling) as % of NDTL on last Friday of 2nd preceding fortnight |
| CRR — How Maintained | As average fortnightly balance on reporting Friday |
| CRR — Where Maintained | In a current account with RBI |
| CRR — Min Daily Balance | Not less than 90% of average fortnightly balance |
| CRR — Interest | No interest paid w.e.f. fortnight ended 31 Mar 2007 |
| CRR — Default Penalty | Bank rate + 3% p.a. for 1st day; bank rate + 5% p.a. from 2nd day onward |
| CRR — Return | Form A (Fortnightly — provisional within 7 days, final within 20 days) |
| CRR — Change Impact | Reduction increases bank liquidity; increase reduces it |
| NDTL Exemptions | Paid-up capital & reserves; borrowings/refinance from RBI, NABARD, NHB; other small items |
| CRR Exclusions | Liabilities to banking system; ACU credit balance; offshore banking DTL; inter-bank term deposits ≤ 1 year; incremental auto/home/MSME loans (14.2.20–31.7.20, 5-yr exemption); new MSME borrowers (no prior loan till 1.1.21, loans ≤₹25L till 31.12.21, 1-yr exemption) |
| SLR — Legal Provision | Section 24 of BR Act |
| SLR — Rate | RBI can fix up to 40% (max) of NDTL; no minimum statutory floor |
| SLR — Form of Investment | (1) Cash balance, (2) balance with other banks & excess CRR with RBI, (3) gold/gold bonds, (4) unencumbered approved securities (govt./trustee securities incl. LAF) |
| SLR — Maintained As | Specified assets (cash, gold, unencumbered approved securities) — unlike CRR which is cash only |
| SLR — Default Penalty | Same as CRR (bank rate + 3% / +5%) |
| SLR — Return | Form VIII by the 20th of every month |
| SLR — Change Impact | Reduction frees funds for lending; increase locks more funds in approved securities |
| CRR vs SLR Key Difference | CRR = cash with RBI only; SLR = broader liquid assets (cash + gold + securities) |
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