What is the Full form of CRR?
The full form of CRR is the Cash Reserve Ratio. CRR reflects the amount of money the RBI (Reserve Bank of India) banks have to hold with. It is a proportion of the total cash retained by a bank. CRR tends to change from one period to the next. RBI decides on the CRR, and banks must maintain a certain proportion of their RBI deposits.
The RBI requires banks to keep a percentage of their deposits in cash form, so the same can be provided to bank customers when the need arises. The CRR is the proportion of cash required to be kept in reserves. They deposit the cash balance in the bank vault or send it to RBI.
How is CRR calculated?
- A bank must store 4 % of the total NDTL (Net Demand and Time Liabilities) in cash form when the current CRR rate is 4%.
- The bank can not use the funds to loan or invest.
The CRR has two main objectives, which are
- Since the portion of the bank’s deposits is with RBI, the safety of the amount is assured. It makes it immediately available if customers want their money or deposit back.
- CRR helps to manage costs under the track. RBI raises the CRR during high economic inflation, so banks need to keep more money in reserves and have little liquidity to start lending.