Cash Reserve Ratio (CRR): Meaning, Advantages, and Its Rate

Parameter	CRR (Cash Reserve Ratio)	SLR (Statutory Liquidity Ratio)
Assets	CRR requires banks to maintain cash reserves with the Reserve Bank of India.	SLR requires banks to maintain reserves of various liquid assets, including cash, gold, government securities, etc.
Returns	Banks do not earn any returns on the money they maintain as CRR.	Banks earn interest on the money maintained as SLR.
Purpose	The RBI controls the banking system’s liquidity through CRR.	SLR helps control a bank’s leverage to expand credit by ensuring solvency.
Maintaining Authority	Banks maintain cash reserves in CRR.	In SLR, the bank keeps the securities and maintains them as liquid assets.

Key Objectives of the Cash Reserve Ratio

The following are the key objectives of the Cash Reserve Ratio:

• CRR helps control inflation. The RBI increases the CRR rate to reduce cash supply in the economy by making loans expensive.

• It ensures banks maintain a minimum amount of funds always available for customers, even under high-demand conditions.

• Banks use CRR as a reference rate for lending loans. Also known as the base rate, banks cannot provide loans below this interest rate.

• By regulating the cash supply, CRR boosts the country’s economy by reducing the rate.

• Reducing the CRR rate is crucial for balancing the economic growth in a country by helping people financially.

Read Also: Reverse Repo Rate: Meaning and How It Works?

Advantages of Cash Reserve Ratio 

Let’s look at the major advantages of Cash Reserve Ratio:

• CRR helps a commercial bank to construct and uphold a solvency position.

• It ensures consistency and proper maintenance in the commercial bank’s liquidity system.

• RBI controls and coordinates the credit that banks maintain through the CRR rate, helping smooth cash and credit supply in the economy.

• When the RBI reduces the current Cash Reserve Ratio, borrowers receive more advances from commercial banks, increasing cash flow to the public.

• CRR improves its position by absorbing liquidity when the interest rates reduce significantly.

• Implementation of the CRR is more effective than other instruments, mainly because it takes less time to control the country’s liquidity system. 

• When the rupee is surplus, CRR eases the financial environment.

Read Also: What is MCLR and How Does it Impact the Loan You are Taking

Conclusion

To have a smooth and successful borrowing experience, you must keep track of the current Cash Reserve Ratio through news, blogs, and articles. When you understand the Cash Reserve Ratio meaning and its impact on inflation, interest rates, and other financial aspects, you can make smarter borrowing decisions related to unsecured loans. Stay updated about the fluctuations in CRR to understand the economy’s liquidity situation and time your borrowing adequately.

Frequently Asked Questions

1. What are the functions of the reserve ratio?

The Cash Reserve Ratio has a vital role in controlling inflation, making loans easily accessible, regulating cash supply in the economy, balancing the country's economic growth, and serving as a base rate for bank loans.

2. What is the main function of reserve requirements?

The main function of reserve requirements is to make loans available to customers when they need to borrow funds.

3. What happens when CRR is increased?

When the CRR increases, banks fall short of funds to spend on other purposes. Consequently, they raise their loan interest rates, making loans more expensive for the borrowers.

4. What is an example of a cash reserve?

Cash reserve is the money a bank must always maintain to meet emergency financial needs. Money market funds, treasury bills, etc., are examples of cash reserves.

5. What is CRR and SLR?

CRR is the Cash Reserve Ratio, the minimum deposit amount every bank must maintain at all times. SLR is a Statutory Liquidity Ratio that a bank must always maintain in the form of cash, gold, government securities, etc.