What is CRR or Cash Reserve Ratio?
The Reserve Bank of India or RBI mandates that banks store a proportion of their deposits in the form of cash so that the same can be given to the bank’s customers if the need arises. The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio. The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements.
The Cash Reserve Ratio in India is decided by RBI’s Monetary Policy Committee in the periodic Monetary and Credit Policy. The Reserve Bank of India takes stock of the CRR in every monetary policy review, which, at present, is conducted every six weeks. CRR is one of the major weapons in the RBI’s arsenal that allows it to maintain a desired level of inflation, control the money supply, and also liquidity in the economy. The lower the CRR, the higher liquidity with the banks, which in turn goes into investment and lending and vice-versa. Higher CRR can also negatively impact the economy as lesser availability of loanable funds, in turn, slows down investment. It thereby reduces the supply of money in the economy.
How is Cash Reserve Ratio calculated? CRR formula:
If the current CRR rate is 3%, a bank is required to store 3% of the total NDTL or the Net Demand and Time Liabilities in the form of cash. The bank cannot use this money for investment or lending.
In technical terms, CRR is calculated as a percentage of net demand and time liabilities (NDTL). NDTL for banking refers to the aggregate savings account, current account and fixed deposit balances held by a bank. So whatever is the aggregate amount, according to current regulations, 3% of the aggregate balances of all these three categories have to be kept with the RBI.
CRR versus SLR
Unlike Statutory Liquidity Ratio or SLR, which can be maintained in either gold or cash, CRR needs to be maintained only in cash.
Objectives of Cash Reserve Ratio
There are two primary purposes of the Cash Reserve Ratio:
Since a part of the bank’s deposits is with the Reserve Bank of India, it ensures the security of the amount. It makes it readily available when customers want their deposits back.
Also, CRR helps in keeping inflation under control. At the time of high inflation in the economy, RBI increases the CRR, so that banks need to keep more money in reserves so that they have less money to lend further.
How does Cash Reserve Ratio help in times of high inflation?
At the time of high inflation, the government needs to ensure that excess money is not available in the economy. To that extent, RBI increases the Cash Reserve Ratio, and the amount of money that is available with the banks reduces. This curbs excess flow of money in the economy. When the government needs to pump funds into the system, it lowers the CRR rate, which in turn, helps the banks provide loans to a large number of businesses and industries for investment purposes. Lower CRR also boosts the growth rate of the economy.
Liabilities not to be included for DTL/NDTL computation
The under-noted liabilities will not form part of liabilities for the purpose of CRR and SLR:
- a) Paid up capital, reserves, any credit balance in the Profit & Loss Account of the bank, amount of any loan taken from the RBI and the amount of refinance taken from Exim Bank, NHB, NABARD, SIDBI;
- b) Net income tax provision;
- c) Amount received from DICGC towards claims and held by banks pending adjustments thereof;
- d) Amount received from ECGC by invoking the guarantee;
- e) Amount received from insurance company on ad-hoc settlement of claims pending judgment of the Court;
- f) Amount received from the Court Receiver;
- g) The liabilities arising on account of utilization of limits under Bankers’ Acceptance Facility (BAF);
- h) District Rural Development Agency (DRDA) subsidy of ₹10,000/- kept in Subsidy Reserve Fund account in the name of Self Help Groups;
- i) Subsidy released by NABARD under Investment Subsidy Scheme for Construction/Renovation/Expansion of Rural Godowns;
- j) Net unrealized gain/loss arising from derivatives transaction under trading portfolio;
- k) Income flows received in advance such as annual fees and other charges which are not refundable;
- l) Bill rediscounted by a bank with eligible financial institutions as approved by RBI;
The SCBs are exempted from maintaining CRR on the following liabilities:
- Liabilities to the banking system in India as computed under clause (d) of the explanation to Section 42(1) of the RBI Act, 1934;
- Credit balances in ACU (US$) Accounts; and
- Demand and Time Liabilities in respect of their Offshore Banking Units (OBU).
- The eligible amount of incremental FCNR (B) and NRE deposits of maturities of three years and above from the base date of July 26, 2013, and outstanding as on March 7, 2014, till their maturities/pre-mature withdrawals
- Minimum of Eligible Credit (EC) and outstanding Long term Bonds (LB) to finance Infrastructure Loans and affordable housing loans.
Penalties on default in maintenance of CRR
The penal interest is charged as under in cases of default in maintenance of CRR by SCBs:
In case of default in maintenance of CRR requirement on a daily basis which is currently 95 per cent of the total CRR requirement, penal interest will be recovered for that day at the rate of three per cent per annum above the Bank Rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day and if the shortfall continues on the next succeeding day/s, penal interest will be recovered at the rate of five per cent per annum above the Bank Rate.
Important Points about CRR
- Scheduled Commercial Banks are required to maintain CRR as per section 42(1) of RBI Act.
- Banks are required to maintain certain percentage of Net Demand & Time Liabilities as cash with RBI.
- As per amendment to sub-section (1) of Section 42 of the RBI Act 1934, with effect from 15t April 2007, RBI can prescribe the Cash Reserve Ratio (CRR) for Scheduled Commercial Banks without any floor rate or ceiling rate. Accordingly, there is no minimum or maximum CRR as per RBI Act and RBI will fix CRR.
- Banks are required to maintain the prescribed CRR based on their NDTL as on the last Friday of the second preceding fortnight.
- Banks are required to maintain daily average balance as fixed percentage of NDTL with RBI. The actual balance on any day of the fortnight (14 days) may be more or less than the required balance. However, cash balance with RBI on any day of the fortnight should not fall below 95% of the required average daily cash balance.
- RBI will not pay any interest on the CRR balances with effect from 31″t March 2007.
- If a bank fails to maintain 95% of required balance with RBI on any day of the fortnight, RBI will charge penal interest for that day at the rate of three per cent per annum above the bank rate on the amount of shortfall. If the shortfall continues on the next succeeding day/s, penal interest will be recovered at a rate of five per cent per annum above the bank rate.
- Reserve Bank of India has prescribed statutory returns i.e. Form A return (for CRR) under Section 42 (2) of the RBI, Act, 1934 to be sent fortnightly.
Statutory Liquidity Ratio
Definition: Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. These are not reserved with the Reserve Bank of India (RBI), but with banks themselves. The SLR is fixed by the RBI. CRR (Cash Reserve Ratio) and SLR have been the traditional tools of the central bank’s monetary policy to control credit growth, flow of liquidity and inflation in the economy. The SLR was prescribed by Section 24 (2A) of Banking Regulation Act, 1949.
Description: Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. Treasury bills, dated securities issued under market borrowing program and market stabilization schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated.
Important Points about SLR
- Statutory Liquidity Ratio is maintained as per section 24 of Banking Regulation Act.
- 2. As per amendment to section 24 of the Banking Regulation Act, the provision relating to maintenance of minimum SLR of 25% of NDTL has been withdrawn. Thus, RBI is free to fix minimum SLR. However, it can be increased to maximum of 40% of NDTL.
- SLR can be kept in the form of (a) cash (b) gold valued at a price not exceeding the current market price, (c) unencumbered approved securities valued at a price as specified by the RBI from time to time (d) cash balance with other banks (e) excess cash balance with RBI. Cash management bill issued by Government of India will be treated as Government of India T Bills and accordingly shall be treated as SLR securities.
- For calculation of SLR, banks are required to send monthly statement on Form VIII under Section 24 of the BR Act.
- If a bank fails to maintain SLR on any day of the fortnight, RBI will charge penal interest for that day at the rate of three per cent per annum above the bank rate on the amount of shortfall. If the shortfall continues on the next succeeding day/s, penal interest will be recovered at a rate of five per cent per annum above the bank rate.
4. Difference between SLR & CRR
Both SLR and CRR are the components of monetary policy. However, there are a few differences between them. The following table gives a glimpse into the dissimilarities:
|Statutory Liquidity Ratio (SLR)||Cash Reserve Ratio (CRR)|
|In the case of SLR, banks are asked to have reserves of liquid assets which include both cash and gold.||The CRR requires banks to have only cash reserves with the RBI|
|Banks earn returns on money parked as SLR||Banks don’t earn returns on money parked as CRR|
|SLR is used to control the bank’s leverage for credit expansion.||The Central Bank controls the liquidity in the Banking system with CRR.|
|In the case of SLR, the securities are kept with the banks themselves, which they need to maintain in the form of liquid assets.||In CRR, the cash reserve is maintained by the banks with the Reserve Bank of India.|