What is Cash Reserve Ratio
Jaap de Jonge, Management Consultant, Netherlands
CRR means Cash Reserve Ratio. It is the minimum ratio that indicates the part of the total deposits to be held as cash.
This term is used in India to indicate that banks are required to hold a certain proportion of their deposits in the form of cash.
Actually, banks donít necessarily hold these as cash with themselves, but may also deposit at the Reserve Bank of India (RBI) / currency chests, which are considered as equivalent to holding cash with RBI.
Example. When a bankís deposits increase by Rs100, and if the cash reserve ratio is 6%, the banks will have to hold additional Rs 6 with RBI and the bank will be able to use only Rs 94 for investments and lending / credit purpose. Therefore, the higher the CRR, the lower is the amount that banks will be able to use for lending and investment.
The power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.