What is CRR in Banking?
In this article we can understand what is crr in banking. cash reserve ratio is part of the total deposit of the bank. Which has to be deposited with the RBI in the form of cash and is a means of controlling the fall. RBI determines the amount of cash reserve ratio to be kept.
The purpose of cash reserve ratio is to control inflation, to control the economy, to reduce or increase the flow of money in the economy.
How to calculate cash reserve ratio?
After knowing What is crr in banking now we can understand how to calculate cash reserve ratio. There is no formula for calculating cash reserve ratio. Every bank has to maintain cash reserve ratio in proportion to the bank’s Net Demand and Time Liabilities (NDTL). NDTL means current bank account, saving account and fixed deposits. This means that the total of these three deposits is calculated as 4% cash reserve ratio.
Objectives of cash reserve ratio
What is crr in banking – All banks have to keep cash reserve ratio with RBI so that depositors’ deposits can be kept safe. Bank accept deposits from account holders and lend to borrowers from these deposits. Banks charge lower interest rates on deposits and higher interest rates on loans.
Therefore, lending is more beneficial to the banks. Sometimes banks can lend more than they need to make more profit. In this case, the liquidity of the bank decreases. And the bank cannot refund the depositor on demand. Therefore, cash reserve ratio has made it mandatory for all banks.
One of the other objectives of the cash reserve ratio is to control liquidity and interest rates in the economy. In addition to cash reserve ratio, there are other ratios by which RBI controls inflation.
These other tools are statutory liquidity ratio, repo rate, reserve repo rate, open market operations and other tools.
How does cash reserve ratio work?
The RBI controls money in the economy by means of debt control. When the cash reserve ratio is high, all the banks have to keep more share of their total deposits with the RBI, leaving less money in the bank and reducing the bank’s ability to lend. Debt default automatically reduces the amount of money in people’s hands, resulting in lower currency in the economy.
On the other hand, when the RBI keeps the cash reserve ratio low, all the banks have to keep a small portion of their total deposits to the RBI, leaving more money to the bank and increasing the lending capacity of the bank. Debt increases the amount of money in people’s hands and as a result the currency in the economy increases.
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The difference between cash reserve ratio and statutory liquidity ratio
Cash reserve ratio and statutory liquidity ratio are the tools of fall control. Each bank is required to keep a portion of the total funds in cash reserve ratio and statutory liquidity ratio. The bank cannot use this amount for lending or investing. The difference between cash reserve ratio and statutory liquidity ratio is as follows –
1.Definition – (What is crr in banking and What is slr in banking)
Cash reserve ratio means a percentage of the total deposit of the bank has to be deposited in the central bank in the form of cash.
Statutory liquidity ratio means that a certain percentage of the total deposit of the bank has to be kept by the banks in the form of securities with the RBI.
2. What percentage is kept –
For cash reserve ratio the RBI will fix 3% to 15% of NDTL, which is binding on all banks.
For statutory liquidity ratio the RBI can fix up to 40% of NDTL and is binding on all banks.
3. Interest –
RBI does not pay interest to banks on cash reserve ratio.
RBI pays interest to banks on statutory liquidity ratio.
4. The nature of the ratio –
cash reserve ratio RBI has to be maintained in the form of cash.
Statutory liquidity ratio has to be maintained in the form of Gold, Government Security.
Advantages of cash reserve ratio –
What is crr in banking – The cash reserve ratio is operated by the central bank. By which the central bank regulates the liquidity of all the banks. In general, they are kept in the form of deposits with the central bank or in the form of cash in the bank’s coffers.
- Therefore, when the financial supply of banks or businesses increases, the cash reserve ratio is increased to reduce the excess currency. So even low cash reserve ratio drives business growth.
- Cash reserve ratio rate is based on the flow of money in the market.
- Cash reserve ratio allows banks to maintain solvency position.