What is the Full form of CRR?
The full form of CRR is the Cash Reserve Ratio. CRR reflects the amount of money the banks of the RBI (Reserve Bank of India) 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 are obligated to maintain a certain proportion of their RBI deposits.
The RBI requires banks to keep a percentage of their deposits in cash form, so when the need arises, the same can be provided to bank customers. The CRR is known to be the proportion of cash required to be kept in reserves. Either depositing the cash balance in the bank vault or sending 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. If customers want their money or deposit back, it makes it immediately available.
- CRR helps to manage costs under the track. RBI is rising the CRR at a time of high economic inflation, so banks need to keep more money in reserves and they’ll have very little liquidity to start lending.