There are many things which affect a stock price & when we talk about banking stocks they are mostly affected by RBI policies other than their individual factors. One of the important factors is CRR along with SLR, Repo rate & Reverse repo rate. Let’s find out what is CRR & other related terms in this article.
Table of Contents
What is CRR?
The CRR full form is Cash Reserve Ratio. CRR is the amount of money that banks must keep on standby with the Reserve Bank of India (RBI).
If the central bank chooses to raise the CRR, the total amount for disbursement at the banks shrinks. The CRR is used by the RBI to eliminate excess liquidity from the system.
On a fortnightly basis, commercial banks are bound to keep an average cash reserve with the RBI that is not less than 3% of their total Net Demand and Time Liabilities (NDTL). The RBI has the authority to raise the CRR to 20% of the NDTL.
Purpose of CRR
The CRR’s purpose is to guarantee that banks hold a minimum level of liquidity against their creditors so that they don’t run out in the event of a rise in fund requests.
Banks are seen as trust icons, and any liquidity problem might result in a trust crisis. CRR’s primary goal is to achieve this.
The RBI also uses it to send signals on the direction of liquidity, but it isn’t utilised very much these days.
CCR Calculation
The measurement of Demand and Time Liabilities is the most essential element of the CRR calculation (DTL). The DTL is the entire amount of liabilities for which the bank must comply with the RBI’s CRR requirements.
Demand liabilities comprise deposits in current accounts, savings accounts, margins held against L/Cs and assurances, unsettled TT/MT/DD, and call money borrowings.
Fixed deposits, cash certificates, and recurring deposits are examples of time obligations.
Nevertheless, DTL would not include RBI loans, NHB/NABARD refinances, income tax allowances, unrealized gains/losses from derivative transactions, and so forth. The CRR must be kept at 4% of the DTL.
Reports & Rules
Banks must keep CRR not just as a % of historical deposits, but also as a percentage of additional deposits, which must be reported to the RBI on a daily basis.
The present CRR rate is 4%, and the RBI adjusts it on a regular basis if the banking system’s liquidity has to be adjusted. Penalties will be imposed on banks if they do not keep the minimum CRR.
How does the RBI use CRR?
CRR balances do not generate interest since they are maintained with the RBI as a reserve in case of an emergency. When the RBI intends to withdraw liquidity from the banking sector and restrict lending ability, it raises the CRR.
CRR reductions are part of the RBI’s easy money policy, and they are used when the central bank wishes to enhance liquidity in the banking sector and stimulate lending.
Banks benefit from a reduction in the CRR since they may now transform their idle non-income bearing deposits into income-producing instruments.
Changes in CRR
The Cash Reserve Ratio is part of the statutory reserves specified by the RBI and is imposed from time to time. The CRR and the Statutory Liquidity Ratio are included in statutory reserves (SLR).
The CRR is kept on file with the RBI to guarantee that banks have enough liquidity to manage any surge in bank withdrawals. It is more of a protective mechanism.
What is SLR?
SLR stands for Statutory Liquidity Ratio, which is the minimum proportion of deposits that a commercial bank must keep in liquid cash, gold, or other assets.
It’s essentially the reserve requirement that banks must meet before they may extend credit to clients. These are held by the banks themselves, not the Reserve Bank of India (RBI).
The RBI determines the SLR. The CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) have long been used by central banks to regulate credit expansion, liquidity flow, and inflation in the economy.
Section 24 (2A) of the Banking Regulation Act of 1949 established the SLR.
Difference between CRR & SLR (CRR vs SLR)
Both crr and slr are significant elements of monetary policy. There are, nevertheless, a few differences among them. The chart below highlights the differences bewteen crr and slr:
| Statutory Liquidity Ratio | Cash Reserve Ratio |
| SLR requires banks to maintain liquid asset reserves, which comprise cash, sovereign bonds, and gold. | The CRR mandates that banks exclusively hold cash reserves with the RBI. |
| Banks gain from money held in SLR accounts. | Banks don’t get interest on funds held in CRR accounts. |
| SLR is used to limit a bank’s credit growth leverage. It guarantees that banks are healthy. | CRR is a tool used by the Central Bank to manage liquidity in the banking sector. |
| In SLR, the instruments are held by the banks themselves, and they must keep them as liquid assets. | The cash fund is deposited by banks to the Reserve Bank of India in CRR. |
Other Related Terms
After Understanding what is CRR, Let’s take a look at other related terms.
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Repo Rate
Repo rate refers to the rate at which the RBI provides funds to commercial banks. It is a monetary policy tool. When banks run out of cash, they can borrow money from the RBI at the repo rate.
A decrease in repo rates allows banks to get funds at a lower cost, and vice versa. In India, the repo rate is comparable to the discount rate in the United States.
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Reverse Repo Rate
The rate at which the RBI collects funds from commercial banks is known as the reverse repo rate. Banks are always ready to provide funds to the RBI because their funds are safe and receive a decent return.
Banks may park more funds with the RBI to receive larger rewards on unproductive capital if the reverse repo rate rises. It’s also a technique that the RBI may employ to withdraw surplus cash from the banking sector.
Conclusion
These all things are maintained by Indian Government to keep check & balances on the banks. All of them affect banking stocks directly & stock market as well.
This is all from our side regarding what is CRR. Let us know your views about formula of slr in the comment section.
Other Interesting blogs related to what is CRR:
Difference between TDS and TCS
Difference Between FDI and FII
Difference between Nifty and Sensex
FAQ About CRR and SLR
What is CRR Ratio?
The Cash Reserve Ratio is the amount of cash that must be maintained in reserve as a proportion of the bank's overall deposits.
CRR formula?
CRR is determined as a proportion of net demand and time liabilities in mathematical language (NDTL). The total savings account, current account, and fixed deposit deposits managed by a bank are referred to as NDTL in banking.
What is CRR in Hindi?
सीआरआर का फुल फॉर्म कैश रिजर्व रेशियो है। सीआरआर वह राशि है जिसे बैंकों को भारतीय रिजर्व बैंक (आरबीआई) के साथ स्टैंडबाय पर रखना चाहिए। यदि केंद्रीय बैंक सीआरआर बढ़ाने का विकल्प चुनता है, तो बैंकों में संवितरण की कुल राशि कम हो जाती है। सीआरआर का उपयोग आरबीआई द्वारा सिस्टम से अतिरिक्त तरलता को खत्म करने के लिए किया जाता है।
CRR vs SLR
CRR is the proportion of funds that a bank must hold in cash with the RBI. SLR, on the other side, is the ratio of liquid resources to time and demand obligations. The CRR governs the flow of funds in the economy, while the SLR protects the banks' solvency.
What is CRR rate?
Commercial banks are required to keep a specific minimum amount of cash as reserves with the central bank under the cash reserve ratio (CRR). The Cash Reserve Ratio is the amount of cash that must be maintained in reserve as a proportion of the bank's overall deposits.
