CRR (Cash Reserve Ratio)

What is Cash Reserve Ratio?

Cash Reserve Ratio is a rule by the Reserve Bank of India that asks banks to keep a small portion of the money you deposit with them as cash reserves. This money is kept safely with the RBI and helps ensure banks have enough funds to handle emergencies.

Calculation of Cash Reserve Ratio (CRR)

The formula for calculating CRR is:
CRR = (Liquid Cash/Net Demand and Time Liabilities NDTL) × 100

Where:
Liquid Cash: The amount of cash reserves that the bank holds with the central bank.
Net Demand and Time Liabilities (NDTL): This includes all deposits held by the bank, such as savings accounts, current accounts, fixed deposits, etc.

How Does CRR Work?

CRR is a percentage of the total money people deposit in a bank. Suppose you deposit ₹1,000 in your bank and the CRR is 4%. The bank will keep ₹40 with the RBI and can use the rest for lending or other purposes.

Why Does CRR Matter?

1. Ensures Your Money is Safe: CRR serves as a safety net for banks. It ensures that banks always have cash to satisfy withdrawal demands.
2. Controls Money Flow: RBI employs CRR to control how much money banks can lend:

• Whenever CRR increases, the banks lend lesser, thus slowing down the spending
• Whenever CRR decreases, the banks lend more thus increasing economic activities

3. Prevents Panic: Keeping some money in hand, the banks are in a better position to face the sudden financial stress and make the banking system more reliable.
4. Affects Loan Rates: The change in CRR will affect the amount that the banks can lend and thus may change the loan interest rates of home or business loans.

Uses of CRR

1. Controlling Credit Availability: Through the adjustment of the CRR, the RBI controls the amount of credit banks can extend. Increased CRR restricts lending while a reduced CRR opens the doors for the bank to provide more credit to spur economic growth.
2. Influence of Inflation: At the time of high inflation, raising the CRR tightens liquidity in the market due to less availability of funds to be provided as credit. Such a contraction may help check the rising pressure of inflation.
3. Ensuring Deposit Safety: The requirement for banks to maintain a portion of deposits as reserves helps safeguard depositors' money, ensuring that banks can meet withdrawal requests even during times of financial stress.
4. Impacting Base Rates: The CRR plays a role in determining base rates—the minimum interest rate at which banks can lend money. Changes in CRR directly affect lending rates, influencing borrowing costs for consumers and businesses.
5. Facilitating Economic Policy Implementation: As part of the overall monetary policy, CRR adjustments enable the RBI to implement economic strategies effectively in response to changing economic conditions and maintaining overall financial stability.