Dear future banker,
‘CRR’, is one of the most commonly heard term in banking. We keep on reading and hearing this term day in and day out through newspapers/ news channels etc.What is this ‘CRR’, and why it is so important? Let us understand it in detail in this article.
‘CRR’ is Cash Reserve Ratio and is defined as ” It is some percentage of the total NDTL ( Net Demand and Time Liabilities ) that all the scheduled commercial banks have to necessarily maintain in the form of cash with the Reserve Bank of India”.
Here ‘NDTL’, is sum of demand and time liabilities (deposits) of banks with public and other banks wherein assets with other banks is subtracted to get net liability of other banks. Deposits of banks are its liability and consist of demand and time deposits of public and other banks.
The Cash Reserve Ratio is governed and managed by the Reserve Bank of India. CRR is Â a great tool to ensure that the banks have enough liquidity when required by the banks.CRR is a critical Â direct financial instrument and Â is used for controlling / managing money supply in the economy. Â At present the value of CRR is 4% ( as on September 28, 2015).
Let us understand how the change in CRR affects/ effects the money supply in the economy.
Case-I – CRR is relatively low: In this condition when the CRR is low,the money that the banks have to keep with RBI will be low, it means the available money with the banks for loans/advances will be more( which will eventually be transferred in the economy) as a result, the money supply in the economy will increase.
Case-II-CRR is relatively high:In this condition when the CRR is high ,the money that the banks have to keep with RBI will be more, it means the available money with the banks for loans/advances will be lessÂ ( which will eventually be transferred in the economy) as a result, the money supply in the economy will decrease.
It is important to understand here that the importance of CRR lies with the fact that it directly controls the money supply in the economy , meaning it also directly influences the growth of the Indian economy. Hence, it can be safely concluded that CRR is not merely a percentage data but a very important tool in determining the overall financial health and growth of the economy.