What is Cash Reserve Ratio (CRR)?
17-02-2024
11:08 AM
1 min read
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Overview:
The State Bank of India (SBI) has requested the Reserve Bank of India (RBI) for a lower cash reserve ratio (CRR) on green deposits raised from customers.
About Cash Reserve Ratio (CRR)
- Under CRR, commercial banks have to hold a certain minimum amount of deposit as reserves with the RBI.
- The percentage of cash required to be kept in reserves as against the bank's total deposits is called the CRR.
- The RBI decides the amount, and is kept with them for financial security.
- The bank cannot use this amount for lending and investment purposes and does not get any interest from the RBI.
- The CRR applies to scheduled commercial banks, while regional rural banks and NBFCs are excluded.
- Following are the critical objectives of the CRR:
- CRR helps control inflation. In a high inflation environment, the RBI can increase CRR to prevent banks from lending more.
- CRR also ensures banks have a minimum amount of funds readily available to customers, even during huge demand.
- CRR serves as the reference rate for loans. Also known as the base rate for loans, banks cannot offer loans below this rate.
- Since CRR regulates the money supply, it boosts the economy whenever required by lowering the CRR.
- How is the CRR Calculated?
- There is no CRR formula. In technical terms, CRR is calculated as a percentage of Net Demand and Time Liabilities (NDTL).
- NDTL for banking refers to the aggregate savings account, current account, and fixed deposit balances held by a bank.
- In case a bank fails to maintain its CRR, it will have to pay fines to the RBI because of that default. The fine is charged for the shortfall.
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Q1) What are Green Deposits?
In general terms, a green deposit is a fixed-term deposit for those who want to invest in environmentally friendly projects. Just like a regular Fixed Deposit scheme, the green deposit pays interest to its investors and has a fixed term. The proceeds that a bank gets from deposit holders get earmarked for allocation to green finance.
Source: SBI seeking lower CRR on green deposits, says chairman Dinesh Khara