Banks are supposed to keep a certain portion of their deposits aside in two compartmentalized areas: a Cash Reserve Ratio (CRR) where banks keep cash (not invested in anything) back with the RBI, and a Statutory Liquidity Ratio (SLR), in which banks are supposed to buy government securities, with a percentage of the money they have deposited. The two ratios reduce the amount of cash that banks can lend to other borrowers.
Today’s chart brings you these ratios since 1962.
The crisis years of 91-92 (when we were about to default) were the toughest – and banks needed to put more than 50% of deposits in G-Secs or with RBI as cash.
In 2008, there was a mini-peak with CRR reaching 9%. Total deposits – FDs+Savings+Current accounts – have been over 50,000 cr. for a while, so each percentage increase takes away more than 50K cr. from the lendable amount by banks.
This means that of the money you give a bank, 30% of it is allocated to lower cost lending (government borrows at around 8.5% nowadays, CRR gives no interest to the bank).