CASH RESERVE RATIO


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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.

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

= RS 1000) .     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 customer’s 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. 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 ….e.

Say if CRR is 20 %. = RS 500)  . + …. 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 customer’s 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. 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 ….e..

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

• 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 .

00 5.00 4.50 4.00 6.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.00 5.00 6.00 5.00 7. (b) 2% of TL) (a) 5% of DL. (b) 2% of TL (a) 5% of DL. (b) 2% of TL 3.00 . (b) 2% of (a)5% of DL.

00 10.50 10.00 10.00 15.00 14.50 11.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 9.50 9-Jul-1994 6-Aug-1994 11-Nov-1995 14.00 15.00 14.00 15.50 14.75 15.00 15.50 9.00 15.00 9.00 14.50 .

50 10.00 15.00 10.50 11.50 9-Jul-1994 6-Aug-1994 11-Nov-1995 14.50 9.00 15.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 9.50 .50 14.00 15.00 10.75 15.00 15.00 14.00 15.00 14.00 14.00 9.

00 8.75 6.50 7.75 9.25 8.00 7.25 5.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 5.25 6.50 5.50 5.50 6.75 6.50 5.50 6.50 .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 8.00 5.75 8.50 7.00 6.00 5.00 5.00 5.

50 5.00 8.75 8.25 8.25 6.75 6.50 6.00 5.50 5.75 6.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 5.50 8.00 5.25 5.50 5.00 5.50 7.50 .50 6.00 7.00 6.75 9.50 7.00 5.00 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.

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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.org..The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: ".in .rbi." -from www..

. 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. 1934.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.

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

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

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

.Liabilities not to be included for DTL/NDTL computation The under-noted liabilities will not form part of liabilities for the purpose of CRR. reserves. EXIM Bank. SIDBI etc.NABARD. ▪ Paid up capital. amount of any loan taken from the RBI and the amount of refinance taken from. any credit balance in the Profit & Loss Account of the bank.

▪ 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.

a lag of one fortnight in the maintenance of stipulated CRR by banks has been introduced with effect from the fortnight beginning November 06. 2002. Procedure for Computation of CRR  In order to improve the cash management by banks. . 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.  Maintenance of CRR on Daily Basis as a measure of simplification.  With a view to providing flexibility to banks in choosing an optimum strategy of holding reserves depending upon their intra fortnight cash flows. 1999.

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. . which is presently 70 per cent of the total CRR requirement. 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. In fact if the default continues on a regular then RBI can even cancel the bank’s licence or force it to merge with a larger bank. penal interest will be recovered at a rate of 5% per annum above the bank rate. If shortfall continues on the next succeeding days. The RBI has the authority to impose penal interest rates on the banks in respect of their shortfalls in the prescribed CRR.

a separate CRR was fixed in respect of demand and time liabilities.  The present level of CRR is 4. Previously.  . the RBI does not pay any interest to the banks on the CRR deposits.The CRR is applicable to all scheduled banks including the scheduled cooperative banks and the Regional Rural Banks (RRBs).  At present.75%. however after 1962 the separate CRRs were merged and one CRR came into effect for both demand and time deposits of banks with RBI. Prior to 1962. 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.

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org .Data Courtesy: www.wikipedia.en.

75 per cent.  --------------------------------------------------------------• The central bank had cut CRR by 0.China is cutting the amount of money banks need to hold in reserve. India • .50 percent to ease liquidity position in market. RBI had reduced CRR by 0. In January. 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%.75 percent to 4. too. The SBI reduced interest rates on car and education loans and is making deep cuts in lending to SMEs.

5 million and $71.  Canada • Mandated regulatory compliance on bank operations.5 million have no minimum reserve requirement.--------------------------------------------------------------• An institution that is a member of the Federal Reserve System must hold its reserve deposits at a Federal Reserve Bank. Between $11.  Of less than $11. Setup a depositor’s insurance fund that would refund deposits in the event of the bank becoming insolvent .0 million must have a liquidity ratio of 3%.

Increasing the percent of this will drain out the money from the banks.    Liquidity in an economy also gets impacted with a change in CRR. Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. Hence take away the excess money from market. .

 . 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.  .

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

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  .

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

50% w.e.  .Earlier CRR was 5. 28-01-2012)  Present CRR is 4.f.f.e. 10-03-2012) This change of 50 points in CRR infused 48000 crores of money the economy.75%(w.

    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 33 34 35 36 37 38 39 .

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