Cash Reserve Ratio (CRR)

🔸Cash Reserve Ratio (CRR) : …..

▪️The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net Demand and Time Liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India. Banks can’t lend the money to corporates or individual borrowers, banks can’t use that money for investment purposes. So, that CRR remains in current account and banks don’t earn anything on that.

▪️CRR refers to the ratio of bank’s cash reserve balances with RBI with reference to the bank’s net demand & time liabilities to ensure the liquidity & solvency of the scheduled banks.

▪️In terms of Section 42(1) of the RBI Act, 1934, all Scheduled Banks are required to maintain with Reserve Bank of India a Cash Reserve Ratio (CRR) of 4% of Net Demand and Time Liabilities (NDTL).

▪️If RBI increases CRR, the available amount with banks comes down, RBI uses it to drain out excessive money from the banks and vice versa.

Cash Reserve Ratio

Cash Reserve Ratio

🔸Statutory Liquidity Ratio (SLR) :

▪️The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold.

▪️Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.

▪️Statutory liquidity ratio is determined by Reserve Bank of India maintained by banks in order to control the expansion of bank credit.

▪️It is determined by a percentage of total demand and time liabilities.

▪️The SLR is commonly used to control inflation and fuel growth, by increasing or decreasing it respectively. The present SLR is 18% (Dec 2020), but RBI has the power to increase it up to 40%, if it so deems fit in the interest of the economy..

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Also Read:- Banking MCQs

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