What is Cash Reserve Ratio (CRR)? Meaning & Rate Explained

The Cash Reserve Ratio Rate (CRR Rate) is a tool used by the RBI to manage money flow in the economy. It’s the percentage of total deposits that banks must keep with the central bank. This money doesn’t earn any interest.
It may sound technical, but CRR impacts you too. It can affect your loan interest rate, EMIs and how easily you get credit. 

Read on to learn the meaning of cash reserve ratio, its objective, how it works and more. 

What is the Cash Reserve Ratio?

CRR or Cash Reserve Ratio is the share of a bank’s total deposits that must be kept aside in cash. The Reserve Bank of India (RBI) sets this percentage. Banks either keep it with the RBI or in their own vaults.

This money can’t be used for lending or repaying debts. It’s there to make sure banks have enough liquidity at all times. Since it limits how much banks can lend, CRR also affects the interest rates they offer. The RBI reviews and updates the CRR based on market conditions.

How is the Cash Reserve Ratio Calculated?

There’s no complicated formula behind CRR. It’s just a fixed percentage of the total deposits a bank holds. This includes money in savings, current and fixed deposit accounts. Banks have to set aside a small portion of this total and keep it with the RBI in cash. 

They cannot use this amount for lending or any other purpose. The RBI decides the CRR rate and can change it depending on the economy.

Penalties for Not Maintaining CRR

Banks must keep a fixed portion of their Net Demand and Time Liabilities (NDTL) with the RBI as per CRR rules. If they don’t, the RBI charges a penalty depending on how long the shortfall lasts.

Here’s how it works:

• First-day shortfall: The bank pays interest at 3% above the RBI’s bank rate on the shortfall amount.
• Continued shortfall: The penalty increases to 5% above the bank rate.

These penalties make sure banks always set aside enough funds to stay liquid and meet customer needs.

Objectives of CRR

Here are some objectives of implementing CRR: 

• Ensure bank liquidity: CRR makes sure banks always have some cash in reserve. This helps them handle customer withdrawals, even during busy periods.
• Guide lending rates: CRR influences how banks set their loan interest rates. It works like a benchmark, helping banks price their loans responsibly.
• Keep inflation in check: By raising CRR, the RBI makes banks keep more money in reserve. This reduces the money available for lending and helps control inflation.
• Boost the economy when needed: When growth slows, the RBI can lower CRR. This frees up funds for banks to lend. Which ends up putting more money into the economy and encouraging spending.

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Impact of Cash Reserve Ratio

​​The Cash Reserve Ratio directly affects how much money banks can lend. Banks must set aside a portion of their total deposits as per the CRR set by the RBI. This amount is based on something called Net Demand and Time Liabilities (NDTL), which includes most customer deposits. When the RBI changes the CRR, it also influences interest rates and overall cash flow in the economy. 

Here’s how CRR impacts you and the banking system:

• Less money to lend: A higher CRR means banks keep more money aside and lend less.
• Higher interest rates: Limited funds may lead to costlier loans.
• Helps control inflation: CRR hikes reduce cash in circulation, which can slow inflation.
• Supports growth when lowered: A lower CRR boosts lending and spending.
• Affects loan access: CRR changes can make loans easier or harder to get.

Consider this example to understand how it affects the bank’s liquidity. Say the current CRR rate is 4.50%. Thus, banks will have to put ₹4.5 for every ₹100 of their NDTL. 

Why Does RBI Change CRR Regularly? 

Since the economy is volatile, the RBI monitors and updates its monetary policies regularly. Doing so helps control inflation and manage liquidity risks. 

The RBI changes the Cash Reserve Ratio periodically to ensure that it aligns with the nation’s fiscal goals. CRR also impacts a bank’s reserves and helps create a safety net for the bank to fall back on in case of a sudden rise in the demand for funds. 

Since this demand can also fluctuate based on economic factors, changing the CRR helps banks be better prepared.

With this understanding of what is Cash Reserve Ratio, you can better evaluate the market to make borrowing decisions and ensure your costs are low. However, with the Online Personal Loan, you don’t have to worry about when to borrow affordably. 

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FAQs on Cash Reserve Ratio (CRR)

What is the Cash Reserve Ratio in India by the RBI?

The Cash Reserve Ratio is the percentage of a bank’s NTDL that it needs to keep as a reserve with the RBI. As of December 2023, RBI has kept the CRR at 4.50%. 

How to calculate the Cash Reserve Ratio?

To calculate the Cash Reserve Ratio, banks must know their Net Demand and Time Liabilities (NDTL). NDTL refers to the deposits made by the customer minus the deposits made by the bank in another institution. Once calculated, banks must keep a percentage of the NDTL as a cash reserve. 

What happens when the Cash Reserve Ratio increases?

When the CRR increases, banks have to keep more funds reserves, which decreases their ability to lend more money and subsequently, the cash in the market. Since liquidity is low with an increase in CRR, the interest rates on loans offered by the bank may increase.