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CASH RESERVE RATIO

CRR
FACTS & HISTORY OF CRR COMPUTATION OF CRR CRR OF DIFFERENT COUNTRIES OBJECTIVES OF CRR INCREASE IN CRR DECREASE IN CRR CONCLUSION

It

is bank regulation that sets the minimum reserves each bank must hold by way of customer deposits and notes.
These

deposits are designed to satisfy cash withdrawal demands of customers.


Deposits CRR RBI

are normally in the form of currency stored in a bank or with the central bank like the RBI. is also called the liquidity ratio as it seeks to control money supply in the economy. has monetary authority of regulation the CRR.

CRR is used as a tool in monetary policy , influencing the countrys economy , borrowing and interest rates .
It works like brakes on the economys money supply. CRR requirements affects the potential of the banking system to create higher or lower money supply.

Let us now understand how CRR requirements affects the potential of banks to create higher or lower money supply Say if CRR is 10 %, RBI receives RS 100 as deposit , then they can lend RS 90 as a loan and will have to keep the balance as RS 10 in customers deposit account. Now the borrower who has received RS 90 as a loan will deposit the same in his bank The borrower's bank will now lend out RS 81 i.e. 90 % of 90 and keep RS 9 in his deposit account As this process continues the banking system can expand the initial deposit of RS 100 into a maximum of RS 1000 ( RS 100 + RS 90 + RS 81 .. + . = RS 1000)

Say if CRR is 20 %, RBI receives RS 100 as deposit , then they can lend RS 80 as a loan and will have to keep the balance as RS 20 in customers deposit account. Now the borrower who has received RS 80 as a loan will deposit the same in his bank The borrower's bank will now lend out RS 64 i.e. 80 % of 80 and keep RS 16 in his deposit account As this process continues the banking system can expand the initial deposit of RS 100 into a maximum of RS 500( RS 100 + RS 80 + RS 64 .. + . = RS 500)

Higher the cash reserve ratio required , the lower the money available for lending. Every time the borrowed money comes into a deposit account of a customer , the bank has to mandatorily keep a part of it as reserves. This reduces credit expansion by controlling the amount of money that goes out by way of loans. This directly affects money creation process and in turn affects the economic activity. Hence central bank in the world increase the requirement of cash reserves whenever they feel the need to control money supply.

Comes under subsection 42(1)

of Reserve Bank of India Firstly came into act in 1935 Depends on Demand Liabilities & Time Liabilities Never remain constant Earlier a min. 3% of total demand and time liabilities was mandatory

Date from which Effective 5-Jul-1935 6-Mar-1960 6-May-1960 11-Nov-1960 16-Sep-1962 29-Jun-1973 8-Sep-1973 22-Sep-1973 1-Jul-1974 14-Dec-1974 28-Dec-1974 4-Sep-1976 13-Nov-1976

CRR as % age of NDTL

Remarks (a) 5% of DL; (b) 2% of TL (a) 5% of DL; (b) 2% of TL) (a) 5% of DL; (b) 2% of (a)5% of DL; (b) 2% of TL

3.00 5.00 6.00 7.00 5.00 4.50 4.00 5.00 6.00

Date from which effective


22-Nov-1986
28-Feb-1987 23-May-1987 24-Oct-1987 23-Apr-1988 2-Jul-1988 30-Jul-1988 1-Jul-1989 4-May-1991 11-Jan-1992 (21-04-1992) 8-Oct-1992 17-Apr-1993 15-May-1993 11-Jun-1994

CRR % of NDTL
9.00
9.50 9.50 10.00 10.00 10.50 11.00 15.00 15.00 15.00 15.00 15.00 14.50 14.00 14.50

9-Jul-1994 6-Aug-1994
11-Nov-1995

14.75 15.00
14.50

Date from which effective


22-Nov-1986
28-Feb-1987 23-May-1987 24-Oct-1987 23-Apr-1988 2-Jul-1988 30-Jul-1988 1-Jul-1989 4-May-1991 11-Jan-1992 (21-04-1992) 8-Oct-1992 17-Apr-1993 15-May-1993 11-Jun-1994

CRR % of NDTL
9.00
9.50 9.50 10.00 10.00 10.50 11.00 15.00 15.00 15.00 15.00 15.00 14.50 14.00 14.50

9-Jul-1994 6-Aug-1994
11-Nov-1995

14.75 15.00
14.50

Date from which effective


22-Jun-2006 23-Dec-2006 6-Jan-2007 17-Feb-2007 3-Mar-2007 14-Apr-2007 28-Apr-2007 4-Aug-2007

CRR % of NDTL
5.00 5.25 5.50 5.75 6.00 6.25 6.50 7.00

10-Nov-2007
26-Apr-2008 10-May-2008 24-May-2008 5-Jul-2008 19-Jul-2008 30-Aug-2008 11-Oct-2008 11-Oct-2008 25-Oct-2008 8-Nov-2008 17-Jan-2009 13-Feb-2010 27-Feb-2010 24-Apr-2010 28-Jan-2012

7.50
7.75 8.00 8.25 8.50 8.75 9.00 7.50 6.50 6.00 5.50 5.00 5.50 5.75 6.00 5.50

Date from which effective


22-Jun-2006 23-Dec-2006 6-Jan-2007 17-Feb-2007 3-Mar-2007 14-Apr-2007 28-Apr-2007 4-Aug-2007

CRR % of NDTL
5.00 5.25 5.50 5.75 6.00 6.25 6.50 7.00

10-Nov-2007
26-Apr-2008 10-May-2008 24-May-2008 5-Jul-2008 19-Jul-2008 30-Aug-2008 11-Oct-2008 11-Oct-2008 25-Oct-2008 8-Nov-2008 17-Jan-2009 13-Feb-2010 27-Feb-2010 24-Apr-2010 28-Jan-2012

7.50
7.75 8.00 8.25 8.50 8.75 9.00 7.50 6.50 6.00 5.50 5.00 5.50 5.75 6.00 5.50

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."
-from www.rbi.org.in

Liabilities of a bank may be in the form of demand or time deposits or borrowings or other miscellaneous items of liabilities. As defined under Section 42 of RBI Act, 1934, liabilities of a bank may be towards banking system or towards others in the form of demand and time deposits or borrowings or other miscellaneous items of liabilities.

Demand Liabilities include all liabilities which are payable on demand that include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs) {Outdated}, Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the Banking System should be shown against liability to others.

Time Liabilities are those which are payable otherwise than on demand that include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit, if not payable on demand, deposits held as securities for advances which are not payable on demand and Gold deposits.

Other Demand and Time Liabilities (ODTL) include interest accrued on deposits, bills payable, unpaid dividends, any amounts due to the "Banking System" which are not in the nature of deposits or borrowing

Liabilities not to be included for DTL/NDTL computation The under-noted liabilities will not form part of liabilities for the purpose of CRR;
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,NABARD, SIDBI etc.

Scheduled Commercial Banks are not required to include inter-bank term deposits/term borrowing liabilities of original maturities of 15 days and above and up to one year in "Liabilities to the Banking System" Similarly banks should exclude their inter-bank assets of term deposits and term lending of original maturity of 15 days and above and up to one year in "Assets with the Banking System" for the purpose of maintenance of CRR. The interests accrued on these deposits are also exempted from reserve requirements.

Procedure for Computation of CRR

In order to improve the cash management by banks,

Maintenance of CRR on Daily Basis

as a measure of simplification, a lag of one fortnight in the maintenance of stipulated CRR by banks has been introduced with effect from the fortnight beginning November 06, 1999.

With a view to providing flexibility to banks in

choosing an optimum strategy of holding reserves depending upon their intra fortnight cash flows, all Scheduled Commercial Banks are required to maintain minimum CRR balances up to 70 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight with effect from the fortnight beginning December 28, 2002.

The RBI has the authority to impose penal interest rates on the banks in respect of their shortfalls in the prescribed CRR. According to Master Circular on maintenance of statutory reserves updated up to June 2008, in case of default in maintenance of CRR requirement on daily basis, which is presently 70 per cent of the total CRR requirement, penal interest will be recovered at the rate of three 3% per annum above the bank rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day. If shortfall continues on the next succeeding days, penal interest will be recovered at a rate of 5% per annum above the bank rate. In fact if the default continues on a regular then RBI can even cancel the banks licence or force it to merge with a larger bank.

The CRR is applicable to all scheduled banks including the scheduled cooperative banks and the Regional Rural Banks (RRBs). The present level of CRR is 4.75%. Previously, there was a floor of 3% and ceiling of 20% on the CRR that could be imposed by the RBI; however since 2006 there is no minimum or maximum level of CRR that needs to be fixed by the central bank of India. At present, the RBI does not pay any interest to the banks on the CRR deposits. Prior to 1962, a separate CRR was fixed in respect of demand and time liabilities, however after 1962 the separate CRRs were merged and one CRR came into effect for both demand and time deposits of banks with RBI.

Data Courtesy: www.en.wikipedia.org

China is cutting the amount of money banks need to hold in reserve, freeing those funds to stimulate the Chinese economy. UBS released a report that lowered their growth forecast for China next year to 8% from 8.3%.

-------------------------------------------------------------- The central bank had cut CRR by 0.75 percent to 4.75 per cent. In January, too, RBI had reduced CRR by 0.50 percent to ease liquidity position in market. The SBI reduced interest rates on car and education loans and is making deep cuts in lending to SMEs.

India

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An institution that is a member of the Federal Reserve System must hold its reserve deposits at a Federal Reserve Bank. Of less than $11.5 million have no minimum reserve requirement. Between $11.5 million and $71.0 million must have a liquidity ratio of 3%.

Canada

Mandated regulatory compliance on bank operations. Setup a depositors insurance fund that would refund deposits in the event of the bank becoming insolvent

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. Increasing the percent of this will drain out the money from the banks. Hence take away the excess money from market.

Liquidity in an economy also gets impacted with a change in CRR.

The Reserve Bank of India (RBI) can increase mandatory cash reserve of banks held by it by 75 basis points in a bid to suck excess liquidity to combat rising inflation.
The increase especially affect corporate lending and long term fundings.

RBI is controlling the supply side of the Funds by changes in CRR . When RBI increases CRR the available funds with the banks will go down and as demand remain the same then people will have to pay more as interest and interest rate will go up.

With the increase in the CRR, banks have to deposit more amount with the Central Bank. Leads to Decreases money supply in the economy. Curbs inflation.
Leads to decrease in the investments.

When CRR is 5% Suppose the NTDL = Rs 100 Amount to be maintained as CRR = Rs 5 Amount bank can lend = Rs 100-Rs 5 =Rs 95 When CRR is 4% Suppose the NTDL = Rs 100 Amount to be maintained as CRR = Rs 4 Amount bank can lend = Rs 100-Rs 4 =Rs 96

With the decrease in the CRR, banks have to deposit less amount with the Central Bank. Increases money supply in the economy. One of the causes of inflation. Leads to increase in the investments.

Earlier CRR was 5.50% w.e.f. 28-01-2012) Present CRR is 4.75%(w.e.f. 10-03-2012) This change of 50 points in CRR infused 48000 crores of money the economy.

Inflation and Growth Gold Problem Stock market Rupee Volatility

SOUND CRR POLICY HELPS TO STRENGTHEN THE ECONOMY

ASHWINI PRIYANK JAIN RIPPUDAMAN SURBHI CHOPRA ANANT LODHA MAYANK AGRAWAL BHANITA TALUKDAR

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