What is the Cash Reserve Ratio?
Cash Reserve Ratio is a legal reserve requirement of the Reserve Bank of India. According to the Legal Reserve Requirements or variable reserve ratio method, commercial banks are obliged to maintain reserves. It is a very quick and direct method for controlling credit creating the power of commercial banks. Commercial banks are required to maintain reserves on two accounts.
- Cash Reserve Ratio(CRR)
- Statutory Legal Reserve Ratio(SLR)
Cash Reserve Ratio(CRR) refers to the minimum percentage of net demand and time liabilities, to be kept by commercial banks with the central banks. It is decided by the central bank. A change in CRR affects the credit creating power of the commercial banks. An increase in CRR means that the commercial banks must keep reserves with the central bank which reduces the excess reserves of commercial banks and limits their credit creating power. Banks do not get any interest on the money that is with the RBI under the CRR requirements.
Objectives of Cash Reserve Ratio
There are two primary objectives of the CRR:
- It ensures the security of the amount. It makes it readily available when required.
- It helps in keeping inflation under control. To fight against inflation RBI increases the rate of CRR and vice versa.
Statutory Liquidity Ratio(SLR) is somehow different from CRR. SLR refers to a minimum percentage of Net Demand and Time Liabilities(NDLT) to be kept by the commercial banks with themselves. It is also determined by the central bank.
The Net Demand and Time Liabilities or NDTL shows the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other bank
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