Financial Statement Analysis

- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Change in Net Working Capital (NWC) Formula
- Cash Flow from Operations Ratio
- Cash Flow Per Share
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity
- Accounting Liquidity
- Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Cash Reserve Ratio Formula
- Liquidity Risk
- Altman Z Score

- Ratio Analysis (17+)
- Turnover Ratios (17+)
- Profitability Ratios (66+)
- Efficiency Ratios (7+)
- Dividend Ratios (9+)
- Debt Ratios (26+)

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**Cash Reserve Ratio (Table of Contents)**

## What is the Cash Reserve Ratio (CRR)?

Cash Reserve Ratio (CRR) is a certain percentage of the total deposits of the bank that must be kept in the current account with the central bank of the country which would mean that the bank shall not have access to that amount of money for any commercial activity or economic activity.

### Cash Reserve Ratio Formula

The reserve requirement is referred to as the reserve amount and the formula for expressing the same is :

**Cash Reserve Ratio = Reserve Requirement * Bank Deposits**

Where Bank Deposits will generally include the following:

Net Demand and Time liabilities which is nothing but a summation of savings accounts, current accounts and fixed deposits which are held by the bank.

The equation for calculating the cash reserve ratio is quite simple in its nature.

- The first part is the reserve requirement which is determined by the central bank of the country after considering all the macro factors that are occurring in the country that is inflation rate, spending rate, demand and supply of the goods, trade deficit, etc.
- The second part of the formula is Net Demand and time deposits which are borrowed by the bank in form of deposits and the central bank likes to keep a certain amount of reserve aside from all banks to survive during the financial crisis.

### Cash Reserve Ratio Formula Examples (with Excel Template)

Let’s see some simple to advanced examples of Cash Reserve Ratio (CRR) equation to understand it better.

#### CRR Formula – Example #1

**ABC bank ltd is registering itself as a bank for the first time with the central bank. It wants to determine its cash reserve requirement and it has calculated its Net Demand and Time liabilities as $1 billion. You are required to calculate all the Cash Reserve Ratio considering reserve requirement is 5%.**

**Solution:**

The central bank has determined a reserve requirement as 5%. Bank’s Net deposits are $1 billion.

4.9 (1,067 ratings)

So, the calculation of Cash reserve ratio equation can be done as follows-

- Reserve Ratio = Reserve Requirement * Bank Deposits
- = 5% * 1,000,000,000

**Reserve Ratio will be**

- Reserve Ratio = 50,000,000.

** **Hence ABC bank needs to keep $50 million in current account with a central bank.

#### CRR Formula – Example #2

**Below is the extract from RBL bank ltd for two financial years. All the below figures are in crores. Assume that Net Demand and Time liabilities is 45% of the total borrowings and Central bank requires a 4% reserve ratio.**

You are required to calculate the cash reserve ratio for both years.

**Solution:**

The Central bank has determined the reserve requirement as 4%. And bank’s Net deposits are 45% of total borrowings.

- Bank Deposits for Mar 2017 = 42,567.85 *45% = 19,155.33
- Bank Deposits for Mar 2018 = 53,163.70 * 45% =23,923.67

So, the calculation of Cash reserve ratio formula of Mar 2017 can be done as follows-

- Reserve Ratio = Reserve Requirement * Bank Deposits
- = 4% * 19,155.53

**Reserve Ratio of Mar 2017**

- Reserve Ratio = 766.22

Now, the calculation of Cash reserve ratio formula of Mar 2018 can be done as follows-

- Reserve Ratio = Reserve Requirement * Bank Deposits
- = 4% * 23,923.67

**Reserve Ratio of Mar 2018**

- Reserve Ratio = 956.95

#### Cash Reserve Ratio Formula – Example #3

**Below is the extract from Federal bank ltd for two financial years. All the below figures are in crores. Assume that Net Demand and Time liabilities is 85% and 90% of the total borrowings and Central bank requires 5% and 5.5% reserve ratio for the year 2017 and 2018 respectively.**

You are required to calculate the cash reserve ratio requirement for both years.

**Solution:**

The central bank requires a reserve ratio to be 5% for 2017 and 5.5% for 2018. And bank’s Net deposit is 85% and 90% for 2017 and 2018 respectively of total borrowings.

- Bank Deposits fo Mar 2017 = 103561.88 * 85% =88,027.60
- Bank Deposits for Mar 2018 =123525.99 * 90% =138533.14

So, the calculation of Cash reserve ratio formula of Mar 2017 can be done as follows-

- Reserve Ratio = Reserve Requirement * Bank Deposits
- = 5% * 88,027.60

**Reserve Ratio of Mar 2017**

- Reserve Ratio = 4,401.38 crores

So, the calculation of Cash reserve ratio formula of Mar 2018 can be done as follows-

** **

- Reserve Ratio = Reserve Requirement * Bank Deposits
- = 5.5% * 111,173.39

**Reserve Ratio of Mar 2018**

- Reserve Ratio = 6,114.54 crores

### Relevance and Uses

When banks source deposits from the public, the key goal of the bank is to lend and in turn to earn a spread. Banks may like to maximize their lending to maximize their profit and keep their idle cash sitting in the balance sheet at a minimum. If most of the funds are lent out and in case there is an emergency or say there is a sudden rush to withdraw funds, then the banks will struggle to meet their commitments or in other words their repayments.

** **Against those deposits ensuring some liquid money is the main purpose of CRR, while its secondary objective is to allow the central bank to control rates and liquidity in the economy. Interest rates swing up or down in the short term depending upon how much of the liquidity is available for the banks to lend. Too much flow of money or spike in money lending will lead to a collapse in the rates, and too little will lead to a spike.

You can download this Cash Reserve Ratio Formula Excel Template from here – Reserve Ratio Formula Excel Template

### Recommended Articles

This has been a guide to Cash Reserve Ratio. Here we discuss how to calculate Cash Reserve Ratio using its formula along with examples and downloadable excel template. You can learn more about financial analysis from the following articles –