Cash Reserve Ratio (CRR)

All Scheduled Commercial Banks are required to keep a portion of money received from its customer with RBI this is called Cash Reserve Ratio. But Why ?  the answer can be known by reading below article on CRR,

All of we know RBI is the controller of Banks and the monetory / credit system of our country. The RBI act gives it wide powers to do so. Cash Reserve Ratio is one such power of RBI.

As per Section 42(1) of RBI act of 1934 RBI having regard to securing monetary stability of the country prescribes CRR without any floor or ceiling rate.

The CRR rate at present is 4% of total Demand and Time Liabilities (DTL). This means for every Rs.100 you deposit in your bank they have to deposit Rs.4 with RBI without any interest.

Demand Liabilities constitutes those deposits which are payable on demand like Current Deposits and Savings Deposits etc.

Time Liabilities constitutes those deposits other than demand deposits like Fixed Deposits, Recurring Deposits etc.

There are certain categories on which CRR is not required to be maintained and there are some exempted categories for CRR also.

A lag of one fortnight is given for banks to maintain the required CRR.  The daily CRR requirement is 95% of the average daily requirement for the fortnight.

RBI do not pay any interest on the CRR balance kept by SCBs.

There is penalty for not maintaining the required CRR of  95%. The rate is 3% above bank rate per anum for the default day. If default carried to next day/s then rate is 5% above the bank rate per anum.

The higher CRR shrinks the funds available with the banks. Lower CRR increases liquidity.