Cash Reserve Ratio
(CRR)
Description
What’s the Cash Reserve Ratio (CRR)? - A Simple Explanation
Banks are an integral part of our lives. We stash our money with them, may take a loan from them, or use their services on a day-to-day basis. But, do you ever think how is it possible for banks to handle the money that they get from people like us? One very important rule they follow is known as Cash Reserve Ratio or CRR. Let us know what CRR is; how it is implemented and why it’s of consequence to every person.
An obligatory norm for all banks is given by the central bank of a country, such as the Reserve Bank of India (RBI).
This is known as keeping in reserve a certain portion of the total deposits, which the commercial banks amass from the public, as ready money deposited with the Reserve Bank. This portion of the deposits should not be lent or invested. This provision serves as a cushion. For example, a bank must deposit ₹4,000 with the RBI if it receives ₹1,00,000 from customers and the CRR is 4%. The balance of ₹96,000 may be lent out or invested in other ways.
Why is CRR Required?
There exist a couple of significance sharing reasons ickle behind the imposition of the Coring ratio: Money Protection: Some of the deposited funds are kept liquid with the RBI, so there is something reserved by the banks at all times for those people if many of them require money to be released simultaneously. The RBI can increase or decrease the CRR to govern the amount of money the banks are lending. Through this, the RBI can control inflation or boost a slowing-down economy if such signs appear. Disciplining the Banks: The CRR does not allow the banks to use all the money that is coming to them. It does not allow total risk-taking by depositors’ money.
What Happens with Change in CRR?
If the CRR is Increased: Then, the banks would have to keep more money with the RBI and, therefore, would be left with a lesser amount to lend to the customers. Consequently, this would aid in managing the market's money flow. Thus, inflation can also be managed in this way. Banks would have less to deposit as reserves with the RBI and be permitted more lenient advances if the CRR were to decline.
This will help in raising the level of economic activity because more money would be loaned to people and corporations.
CRR against SLR
You must have come across SLR (Statutory Liquidity Ratio) too. CRR and SLR both are the rules for banks but they differ. CRR: The money is kept in the form of cash with the RBI, but it does not bear interest. SLR: Banks keep some percentage of their deposits in gold, government bonds, or any such assets which are approved, which do earn some interest.
What impact does CRR have on you?
In the jargon of finance, rate of CRR influences loan interest rates and every other person in one form or the other: Loan Interest Rates: Increase in CRR would mean banks would increase their loan interest rates because they have less money to lend; decrease it and the loans might become cheaper. Deposit Interest Rates: The rates at which banks pay on savings or fixed deposits could also change along with CRR changes.
At What Points Does the RBI Alter the CRR?
RBI reviews CRR from time to time, generally through its monetary policy meetings. In case it intends to support growth, it may reduce CRR so that the banks may lend more.
Why CRR is Important for the Country?
It ensures that banks will always hold some portion of their money in reserve in case of emergencies. Stability: strength and saves the banking system from failure Economic Balance: Provides RBI a way to manage money flow throughout the country.
Conclusion
The Cash Reserve Ratio is a very simple and easy rule, but a very mighty one. This then helps in protecting the money of the customers, keeping the banks within discipline, and controls the financial flow of the country. So each time you hear about interest rates or the RBI on the news, remember the CRR; it’s operating silently in the backdrop to keep everything safe for everybody.