Cash Reserve Ratio
In order to crack bank exams, one must be familiar with the terms Cash Reserve Ratio and Statutory Liquidity Ratio. CRR & SLR are tools used by Reserved Bank of India under its monetary policy.
Concept of Cash Reserve Ratio & Statutory Liquidity Ratio is quite simple but yet requires a deep understanding. So, what is CRR in the banking section? Why it is beneficial for RBI? What is the different between CRR and SLR? Well, here you’ll find every single answer.
Cash Reserve Ratio
What is Cash Reserve Ratio (CRR) ?
Let’s begin with a small introduction of CRR. Cash Reserve Ratio is that monetary portion that the banks need to keep with RBI. This ratio engaged in securing the bank solvency and to pump out the excessive money from the banks.
For Example, if an individual has deposit Rs 2000 in a bank, the bank is not authorized to use the entire portion of Rs. 2000 for lending or investment purpose.
They need to keep a certain percentage of their deposit in cast form & can only make use of certain portion for lending or investment purpose. The central bank determines this minimum percentage which in turn known as Cash Reserve Ratio.
Thus, if the cash reserve ratio is 9% and when the bank’s deposit experience a boost of Rs 2000, the bank will only be able to use Rs 1820 for investment or other purposes and the remaining Rs 180 it need to keep with RBI.
Higher CRR indicates that the bank has lower amount to use for lending and investment purpose and vice versa. CRR is used by RBI to curb inflation and also to control excessive liquidity in the market.
Key RBI Policy Rates and Ratio
|Current Bank Rate||6.25%|
|Current Repo Rate||6.00%|
|Current Reverse Repo rate||5.75%|
|Current Marginal Standing Facility Rate||6.25%|
|Current Cash Reserve Ratio||4%|
|Current Statutory Liquidity Ratio||20.00%|
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Why RBI Uses Cash Reserve Ratio ?
- RBI uses this ratio to manage currency supply in the market which in turn results in economic development. The variation in this ratio controls the currency supply in the market.
- In order to curb inflation and regulates inflation, RBI uses this ratio in productive manner.
- Decrease in CRR help people in getting loan at low rate of interest. This results in boosting up employment opportunities as the availability of funds is high when CRR is low.
- Reduction in cash reserve ratio permit banks to render more money for agriculture sector. This in turn helps the farmers to access high quality seeds and make good use of latest technology.
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What is Statutory Liquidity Ratio (SLR)
Banks also need to maintain a minimum percentage of their investment in the form of gold, cash, government bonds or other securities; this indicates that banks can earn interest upto some extent on these investments. This percentage is known by the name Statutory Liquidity Ratio.
Statutory Liquidity Ratio is decided on the basis of time liabilities and percentage of total demand. An example of Time liability is term deposit which is payable after a particular time period and not payable on demand. Deposits in a saving account acts like a example of demand liability, which is payable on demand just like cheques.
For Example, if an individual deposit Rs100/- in bank, where CRR = 9% and SLR = 11%, in this case the bank can only use 100-9-11= Rs. 80/- for loan or other purposes.
Note: This is all about Cash Reserve Ratio. For more interesting facts, stay connected with us only at www.recruitmentinboxx.com
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