Cash Reserve Ratio (CRR)


The cash reserve ratio (CRR) is the ratio (fixed by the RBI) of the total deposits of a bank in India which is kept with the RBI in cash form.

The cash reserve ratio refers to the percentage of the total Net Demand and Time Liabilities (NDTL) with the commercial banks which they have to maintain with the RBI in cash form.

The requirement applies uniformly to all banks in the country.

CRR is also called the Liquidity Ratio as it seeks to control money supply in the economy.

These deposits are designed to satisfy cash withdrawal demands of customers.

CRR is used as a tool in monetary policy, influencing the country’s economy, borrowing and interest rates.

The higher the cash reserve (CRR) required, the lower the money available for lending.

The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors.

Payment of interest by the RBI on the CRR money to the scheduled banks started in financial year 1999–2000 (in the wake of banking slow down). Though the RBI discontinued interest payments from mid-2007.

All Scheduled Commercial Banks (that includes public and private sector banks, foreign banks, regional rural banks and co-operative banks) are required to maintain a cash balance on average with the RBI on a fortnightly basis to cater to the CRR requirement.

Non-Bank Financial Corporations (NBFCs) are outside the purview of this reserve requirement.

 

Effects of CRR on economy

When RBI increases CRR—

[1] Banks have less money to lend.

[2] Banks increase lending rate.

[3] Demands for services and goods come down.

[4] Slowdown in economy.

When RBI decreases CRR—

[1] Banks have more money to lend.

[2] Banks decreases lending rate.

[3] Increase in Demands for services and goods.

[4] Growth in economy.