Full Form of CRR

Updated on January 29, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Full Form of CRR – Cash Reserve Ratio

The full form of CRR is the Cash Reserve Ratio. CRR refers to the share of the total deposit by the commercial banksCommercial BanksA commercial bank refers to a financial institution that provides various financial solutions to the individual customers or small business clients. It facilitates bank deposits, locker service, loans, checking accounts, and different financial products like savings accounts, bank overdrafts, and certificates of deposits.read more which they have to keep with the central bank in the form of liquid cash, and it acts as a tool used by the central bank to control liquidity in the banking system.

Key Takeaways

  1. The cash reserve ratio or CRR is the total deposits that commercial banks keep aside with the RBI to fend during emergencies, bankruptcy, or unpredictable contingencies.
  2. The banks deposit the amount in the form of liquid cash, which also maintains the money flow in the economy. CRR is the rate that influences the interest rates in the economy.
  3. SLR, or Statutory Liquidity Ratio, is the money invested by RBI in various securities. So basically, banks earn through this ratio.
  4. CRR and SLR are important ratios that ensure money flows smoothly in the country. 

Objectives

Following are important objectives of CRR:

CRR Objectives

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CRR vs SLR Video Explanation

 

CRR Formula

The following is the formula to calculate the Cash reserve ratio:

Cash Reserve Ratio = (Reserve Requirement / Bank Deposits) * 100%
 
Reserve Requirement = Cash Reserve Ratio * Bank Deposits

Where,

Full Form of CRR

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Example of CRR

Let’s take an example of a bank with total deposits of $1,500 billion in its annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more as of December 31, 2019. Now, the reserve requirement of the Federal Reserve, i.e., the cash reserve ratio, is 9%. So, calculate the bank’s cash reserve requirement for the year 2019.

Solution:

In the present case, it is given that as of December 31, 2019,

  • Total deposits of bank = $1,500 billion
  • Cash reserve ratio = 9%

Now according to the formula, the reserve requirement will be calculated as:

Example of CRR(Cash Reserve Ratio)
  • Reserve Requirement = 1,500  *  9%
  • Reserve Requirement = $135 billion

Thus, the bank’s cash reserve requirement for 2019 is $135 billion.

Impact of CRR

The cash reserve ratio directly impacts the interest rate in the economy. If the central bank increases the CRR requirements of the bank, then it will lower the lending requirement of the bank; therefore, it will not be able to lend more, and hence the rule of demand and supply will apply here. With lower lending capacity, the lending rate will rise, and the expense of borrowing will increase. On the other hand, banks will encourage people to provide more and more deposits and attract them; the deposit rate will be reduced. Therefore, the interest rate in the economy will fluctuate.

Importance of CRR

The cash reserve ratio lays a foundation for the better functioning of the banking industry. The following are the main importance of the Cash Reserve Ratio:

Difference between CRR and SLR

Advantages

The following are the benefits of the Cash Reserve Ratio:

Disadvantages

The following are the disadvantages of the Cash Reserve Ratio:

  • A frequent change in the CRR may adversely affect a healthy economic environment.
  • It is the amount set aside in the current account of the central bank. Hence banks don’t earn any interest on the same, not even gain the inflation portion.
  • It reduces the bank’s lending capacity and stops them from earning the maximum profit.

Conclusion

CRR is the abbreviation used for Cash Reserve Ratio. The portion of the commercial bank’s total deposits is compulsory for it to maintain with the country’s central bank in the form of the cash reserve. Out of this reserve requirement, money cannot be used for any commercial lending. Therefore, it is a primary way of controlling the money supply in the economy.

Frequently Asked Questions (FAQs)

Who decides CRR and SLR?

The RBI decides CRR and SLR based on the money flow patterns and the economy.

What happens when CRR increases?

Increased CRR reduces the money supply, raises interest rates on mortgages, auto loans, and other loans in the interbank market, increases demand for money, and lowers inflation.

Is CRR and repo rate the same?

The cost of credit is the rate of interest we charge banks for our loans. Similarly to this, banks contact RBI for loans. As a result, the rate at which RBI lends money to banks is known as the repo rate. Repo rates apply when banks get credit from the RBI by offering their approved securities for sale.

What happens when CRR isn’t maintained?

If the daily balance of cash reserves (CRR) held by a bank during any fortnight is less than the minimum required by or under these Directions, the bank must pay the Reserve Bank the penal interest.

Recommended Articles

This has guided the Full Form of CRR (Cash Reserve Ratio) and its meaning. Here we discuss examples of CRR along with the impact and differences between SLR and CRR. You may refer to the following articles to learn more about finance –

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