What is Convertible Fund Ratio?
Bank tries to control its credit reserve by making changes in its fund. This is done in two ways.
• The Reserve bank has the right, under the process of Cash Reserve Ratio (CRR), to bind the banks to deposit the cash amount equivalent to 3% to 15% of the amount deposited with them. Reserve bank can bring down the liquidity in the market with the help of CRR. This means that in case of dearness, reserve bank increases the CRR (Cash Reserve Ratio) which results in the lack of money. As a result, dearness reduces due to fewer purchases in the market.
• Another way is Statutory Liquidity Ratio (SLR). Under this system, it is compulsory for the commercial banks to keep at least 25% of their deposits in the reserve bank. This contribution is kept in as securities, gold or foreign currency. here the point to consider is that this amount is other than CRR. Reserve bank can increase the SLR up to 40%.
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