Reviewed by: Fibe Research Team
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.
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.
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.
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:
These penalties make sure banks always set aside enough funds to stay liquid and meet customer needs.
Here are some objectives of implementing CRR:
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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:
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.
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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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%.
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.
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.