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CRR is the minimum percentage of total deposits (i.e. NDTL) that a commercial bank is obliged to hold in cash reserves with the Reserve Bank of India (RBI) to meet regulatory requirements.
It has to be in the form of cash to be accepted. It applies to all commercial banks that are on the Scheduled Commercial Banks list.
Consider the following scenario: Bank A has received deposits totalling Rs. 100 Crores from customers. Using a CRR of 3%, Bank A must deposit 3 crores in cash with the RBI and is left with 97 crores for its operations.
When a central bank raises the cash reserve ratio (CRR), the quantity of money available to banks decreases or declines, and the opposite is true. It must be deposited in a bank vault or with the Reserve Bank of India (RBI).
The Reserve Bank of India Act 1949, Section 42, provided for the RBI to announce a CRR ranging between 3 per cent and 15 per cent. This was changed in 2007 by eliminating the lower ceiling and increasing the range from 0 to 15%.
The CRR will remain at 3 percent until the end of December 2021.
Incremental CRR
This method is utilised when banks see a rapid increase in the number of deposits they accept. As a result, banks would lend more money and inject more money into the economy, hence increasing inflationary pressures. A separate CRR is utilised for deposits made after a specific date, to guarantee that surplus liquidity is absorbed by the RBI in the form of Incremental CRR, if applicable.
Following the demonetization, the Reserve Bank of India slapped a 100 per cent CRR on deposits made in Scheduled Commercial Banks between September 16 and November 11.
Objectives of Cash Reserve Ratio
The Cash Reserve Ratio is important for two reasons: first, it helps to ensure that the bank has enough cash on hand to cover any shortfalls in the event of a liquidity crisis.
There is no danger to the money because it is held in trust by the Reserve Bank of India, which holds a percentage of its deposits. For clients, it simplifies the process of getting their deposits repaid.
Additionally, the CRR contributes to the management of inflation. A considerable increase in the central bank’s cash reserve ratio (CRR) occurs when the economy experiences severe inflation, requiring banks to retain greater amounts of cash in reserves, thus decreasing their capacity to lend. When there is a need to inject funds into the market, the Reserve Bank of India reduces the cash reserve ratio (CRR), which in turn allows banks to give loans to a large number of enterprises and industries for capital expenditure. A decrease in the CRR also has the additional benefit of increasing the growth rate of the economy. Using the CRR aggressively to regulate domestic liquidity and target the monetary roots of inflation, China has become a global leader in this field.
Difference between CRR and SLR
Basis | CRR | SLR |
Meaning | The Central Reserve Ratio (CRR) is the amount of money that banks are required to deposit with the central bank in the form of cash. | The SLR is the amount of capital that banks are required to retain as liquid assets, such as cash, gold, authorised securities, and so on. |
Regulates | The country’s monetary stability is important. | Leverage is available to the bank for loan expansion. |
Use | It is necessary to remove surplus money economic system. | To ensure the viability of the commercial bank. |
Maintenance with | The Central Bank of India i.e. RBI | Bank itself |
Return | Banks don’t earn any interest as a return on the money kept as CRR | Banks usually earn interest as a return on the funds kept as SLR. |
Conclusion
In the case of CRR, banks are required to maintain cash reserves with the Reserve Bank of India, but in the case of SLR, banks are required to maintain liquid asset reserves with themselves. Central Reserve Ratio (CRR) is a metric used by the Central Bank of India to regulate liquidity in the economy and govern money flow in the country.
