On this page, We are going to learn about the full form of CRR As well as the meaning of CRR, what CRR stands for, the abbreviation, and the acronym for CRR, So you should read this post till the end.
The Full Form of CRR: Cash Reserve Ratio
CRR stands for Cash Reserve Ratio. It is compulsory for commercial banks to deposit a certain percentage of their total cash with the Reserve Bank. There is a fixed percentage or proportion involved.
Depending on the proportion of the deposit, the Reserve Bank of India decides how to deposit it. It is usually between 3 and 15% to have a cash reserve ratio.
In short, This is the proportion or percentage of commercial banks’ total deposits that they keep with the Reserve Bank in the form of a Cash Reserve Ratio.
Banks keep these deposits in their current accounts with the Reserve Bank. Commercial banks do not receive any interest on these deposits from the Reserve Bank as it does with traditional current accounts.
Commercial banks are not allowed to use this amount held with the Reserve Bank. The money cannot be used for economic or business purposes. It is even impossible for commercial banks to lend this part to entrepreneurs or the general public.
Example of CRR in Banking
Let’s understand with an example, There is a deposit of Rs 5 lakh with a commercial bank. The CRR rule of 3 percent is currently in effect. The bank must keep 3 percent of Rs 15,000 with the Reserve Bank from its deposit of Rs 5 lakh with the Reserve bank.
This Rs 15000 cannot be used by a commercial bank for any kind of business or investment activity. On behalf of the bank, these 15000 rupees will be deposited in a Reserve Bank current account.
The remaining 4,85,000 will be used by the commercial bank for its daily activities, such as lending and investing.
The objective of the Cash Reserve Ratio
- Inflation, money supply, and liquidity in the economy are all controlled by the cash reserve ratio.
- Using CRR in the economy allows people to control their purchasing power. RBI increases the CRR when purchasing power increases, thus controlling purchasing power.
- Due to banks’ requirement to keep a portion of their deposits at the RBI, depositors can rest assured that their money is safe.
- In such a case, banks can use the reserve cash kept with RBI if they cannot meet the withdrawals by depositors.
Differences between CRR and SLR
there are different types of points that prove, How the Cash Reserve Ratio is different from the Statutory Liquidity Ratio? let’s understand the Difference between CRR and SLR
| Cash Reserve Ratio (CRR) | Statutory Liquidity Ratio (SLR) |
|---|---|
| The Monetary Policy Committee of the RBI decides on the CRR as a monetary policy tool. | The RBI Monetary Policy Committee also decides on SLR as a monetary policy tool. |
| CRR is a reserve that banks have to keep with RBI. | SLR is a reserve that banks have to keep with them. |
| There needs to be a cash reserve for CRR. | Gold, cash, or other approved securities are used to maintain SLR. |
| CRR gives control over inflation and the money supply in the economy. | SLR helps the banks to face sudden huge withdrawals by the depositors. |
| CRR also helps in regulating the liquidity in the economy. | SLR helps in regulating the credit facility. |
| In the case of CRR reserve, banks do not earn any interest on the reserve amount. | In the case of SLR reserve, banks can earn interest on the reserve amount. |
| The CRR rate is decided by the RBI Monetary Policy Committee. | The SLR rate is decided by the Monetary Policy Committee of RBI. |