Saturday Brain Storming Thought (229) 29/06/2024
CASH RESERVE RATIO
Cash Reserve Ratio (CRR)
Cash Reserve Ratio is one of the many monetary policy tools that RBI uses to control the money supply in the economy
Cash Reserve Ratio is a certain percentage of cash that all banks have to keep with the RBI as a deposit
This percentage is fixed by the RBI and is changed from time to time by the central bank itself
Objectives of CRR
1) CRR aids in the control of inflation
2) In an inflationary climate, the RBI can raise the CRR to deter banks from lending more
3) CRR also assures that banks have a minimum level of funds available to customers, even in times of high demand
4) The CRR serves as the loans reference rate
5) Bank cannot offer loans at rates lower than the basic rate for lending
6) Since the CRR regulates the money supply, it stimulates the economy whenever necessary by lowering the CRR
CRR as on today
The CRR is among the important components of RBI’s monetary policy, as of 2023, The CRR rate is 4.50%, which has been effective since 21/05/2022
Working of CRR
1) CRR is the percentage of a banks net demand and time liabilities (NDTL) that is required to maintain as cash reserves with the central bank
2) NDTL includes deposits and certain other liabilities of commercial banks
3) Mandatory Reserves – it specifies the percentage of NDTL that banks must keep as cash reserves
4) Reserve Maintenance – Banks are required to maintain their cash reserves on a daily basis, as prescribed by central bank
5) Banks transfer the required amount from their own funds to this account
6) Purpose and Impact – CRR is to control money supply in the economy
7) Liquidity Management – By adjusting the CRR requirement, the central bank can influence the Liquidity positions of banks
8) Increasing CRR reduces the lendable resources of banks, thereby draining liquidity from the system
9) Decreasing the CRR injects liquidity in the banking system
10) Monetary Policy Tool – Central Banks use changes in the CRR as a part of their monetary policy framework
11) Increase CRR to tighten monetary conditions and control inflation
12) Decrease CRR to ease liquidity and stimulate economic growth
13) Implications for Banks – CRR funds do not earn interest
14) Banks have to forget potential earnings on CRR funds
15) Statutory Requirement – CRR is typically a statutory requirement
16) Banks are legally obligated to maintain the specified percentage of their NDTL as cash reserves
17) Non-compliance with the CRR requirement may lead to penalties or other regulatory actions
Impact of CRR on home loans
If CRR Increased, it can lead to higher interest rates on home loan and reduced availability of credit
CRR formula
CRR = (Amount of cash reserves held by the bank with central bank) / (Net demand and Time Liabilities)
Advantages of CRR
1) Controlling Inflation
2) Stabilizing the Financial System
3) Maintaining Liquidity in the Banking System
4) CRR helps commercial banks to build and sustain the solvency position
5) Smooth supply of cash and credit in the economy
6) During the surplus rupee situation, CRR plays a constructive role in easing the financial environment
Disadvantages of CRR
1) Reduced profitability for banks
2) Limitations in Implementation
3) Impact on credit availability
4) Reducing CRR during a period of economic downturn can lead to an increase in inflation
Act for CRR
The Reserve Bank of India Act, 1934
In terms of section 42 (1) of the Reserve Bank of India Act 1934
I CRR (Incremental CRR)
The I-CRR is an additional cash balance which the RBI can ask banks to maintain over and above the CRR – for a specific period
Introduction of CRR
CRR was introduced in 1950 primarily as a measure to ensure Safety and Liquidity of banks deposit
COMPILED BY:-
Er. Avinash Kulkarni
9822011051
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer
