CRR description

CRR - Cash Reserve Ratio is a percentage of NDTL (net demand and time liability) of the bank, which bank has to keep with RBI and which bank cannot lend to anyone.

So, what is NDTL ??

Bank as 2 types of deposits

DEMAND DEPOSITS : It refers to deposits which can be withdrawn by you, on your demand and bank will have no obligation or objection in doing so, if you have account in bank.

Ex: Current Account and Savings Accounts (combinely referred as CASA)

TIME DEPOSITS : It refers to deposits made by you which should not be withdrawn before the mentioned period by the bank. Its not that on your demand they will not give the money, but if want the money before the maturity period of the time deposits , you will have to pay the fine.

Ex: Fixed Deposits, Recurring Deposits (combinely referred as FDRD)

Now, NDTL = NET DEMAND AND TIME LIABILITY , Means net amount of money bank has in its deposits adding both types of deposits.

You can look it as NDTL = CASA + FDRD

Now, coming to Definition of CRR, it is % of NDTL.

Suppose NDTL of a bank is Rs.100 Cr i.e, bank has 100 Cr in CASA and FDRD combined. Now this is the total money which bank have, to lend to loan borrowers . so, 4% Of 100 Cr. = 4 Cr. This 4Cr is CRR.

This is the amount bank has to keep with RBI in form of cash only.

Cannot lend to anyone from this, as a result will not have profit on this.

Banks cannot invest this amount anywhere.This is simple idle money.

Why RBI keep CRR ?

Suppose there is no CRR and no SLR , so bank can lend all the money to the borrowers of loan, so lets say it has 100 Cr. Ndtl and it lended it all now bank has no money to lend. Now, some depositor who have FDRD of some 20 Lakh or of any amount came to withdraw, from where will the bank pay.

Lets even say, bank has some amount to pay, but what if some emergency condition of the bank and bank needs money. So, basically rbi keeps CRR so, that if there are some unforeseen circumstances arises, bank should have enough money to handle it, so it should have some money in reserve.

SLR - Statutory Liquidity Ratio

It is also some % of NDTL , that bank have to maintain in terms of not only cash but in any terms.

Difference between CRR and SLR ?

Taking our previous example let NDTL=100 Cr. , now 4% of this NDTL is kept with rbi, Which cannot be lent to anyone, cannot be invested and CRR should only be in cash.

Now, SLR is say 21% of NDTL = 21 Cr.

SLR Can be kept in either in form of cash OR in form of GOLD or in form of Govt. bonds , point is it should be kept in liquid form, so that whenever bank need money they can have cash in replace of gold as. So, here it is not necessary to keep in cash only.

As, cash in not necessary condition banks prefer to invest this in gold of govt. backed securities, why ? because if they keep it in cash , it will not yield any profit to them if they invest this money in gold of G-sec, it will yield some profit instead.

if already CRR then why SLR ?

This is an obvious question, Lets say bank does not have SLR, it only has CRR which certainly needs to be higher if SLR is not to be kept.

So, lets say CRR= 25%, now bank have to keep 25% of NDTL with RBI, on which they will not have any profit, and which they cannot invest anywhere, and which is CASH.

That idle money of huge amount will result to loss of bank ,as 25% of their cash is kept idle and they don’t earn anything on it, so to maintain their profits they will rise the interest rates on home loan, car loan etc.

So, SLR is kept so that bank can keep it as security as well as can earn a profit, so that economy doesn’t have to pay for it. So, that not much amount of CASH of bank is kept idle.

Who checks if banks are maintaining CRR , SLR or not ? and what if banks are not able to maintain ?

RBI monitors whether a bank maintains a CRR and SLR or not. RBI Checks CRR , SLR of banks every fortnightly , If banks do not maintained Reserve ratio then fine is imposed as bank rate + 3% and so.

Concluding the answer by finally analyzing our example :

NDTL = 100 Cr.

CRR = 4 Cr.

SLR = 21 Cr

SO, net money with bank left to lend = 100 - 4 -21 = 75 Cr.

Hope you understand !

I tried to be as lucid as i can.

Btw, current CRR = 4% And SLR = 21% (as, on Bi-Monthly policy of RBI, August 2016)

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