This is the amount of money that the banks have to necessarily park with the Reserve Bank of India. The base of this is the total of the deposits that a bank has. The Reserve Bank of India pays the bank interest on the amount parked with it. Among the tools available to the RBI to influence and control the monetary aggregates in the country, the most powerful is that relating to cash reserve requirements imposed on banks. Under section 42 (1) of RBI act, 1934, every scheduled commercial bank was required to maintain with the RBI every fortnight a minimum average daily cash reserve equivalent to 3% of its Net Demand and Time Liabilities (NDTL) outstanding as on the Friday of previous week. RBI uses the CRR either to impound the excess liquidity or release funds needed for the economy from time to time. CRR is the amount the commercial banks need to maintain with the Reserve Bank of India. The amount is based on a fixed percentage computed on each bank's total time and demand liabilities. A CRR of 7.5 per cent means that the banks need to set aside Rs 7.5 for every Rs 100 they receive in deposits. The CRR imposes a cost on the banking system. This is because banks do not receive more than 6.5 per cent interest on the CRR, while they earn higher returns if the money is lent to customers or invested in bonds.
[...] Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) General With a view to monitoring compliance with statutory reserve requirements viz. Cash Reserve Ratio and Statutory Liquidity Ratio by the Scheduled Commercial Banks (SCBs), Reserve Bank of India has prescribed statutory returns i.e. Form A return (for CRR) under Section 42 of the RBI, Act and Form VIII return (for SLR) under Section 24 of the Banking Regulation Act The terms CRR and SLR. CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. [...]
[...] The Reserve Bank of India reduced Cash Reserve Ratio substantially in stage from 15% in 1995 to 10% in January These changes took place in view of the changing requirement of the banking system and in compliance with the recommendation of the Narasimham committee. The CRR was reduced as follow during this period: On July Reserve Bank of India announce an increase in CRR by point to in two stages by point each effective form July 29 and August The obvious objective of this rise was to absorb resources of scheduled commercial banks to the extent of Rs crore at each stage. [...]
[...] Cash Reserve Ratio and Interest rates rate) to five major banks) Call Money rate (Low/high) Source: RBI Effects on money supply Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is for example, a bank that receives a $100 cash deposit can lend up to $90 of that deposit, keeping only a $10 cash deposit within the bank. If the borrower then writes a check to someone who deposits the the bank receiving that deposit can lend out $81. [...]
[...] "The bank has decided on this revision taking into consideration the recent hike in Cash Reserve Ratio and its likely impact on cost of funds with resultant pressure on the spread," said a press release from the bank. The increase will impact loans with floating interest linked to BPLR. However, the hike will not apply to existing housing loans granted on a floating rate basis, added the release. Our Chennai Bureau reports: Indian Overseas Bank has spared individual housing and education loans from the upward revision of interest rates. [...]
[...] Historically, cash reserve ratio (or CRR) is the percentage of bank reserves to deposits and notes. The cash reserve ratio is also known as the cash asset ratio or liquidity ratio. The Bank of England holds to a voluntary reserve ratio system. In 1998 the average cash reserve ratio across the entire United Kingdom banking system was Other countries have required reserve ratios (or RRRs) that are statutorily enforced COUNTRIES C.R.R RATE United Kingdom None Chile 4.50 India 6.50 China 11.50 Pakistan 7.50 United State 10.00 Estonia 15.00 Zambia 17.50 Suriname 35.00 In some countries, the cash reserve ratios have decreased over time (sourced from IMF Financial Statistic Yearbook): Additional cash reserve:- The Reserve Bank is authorized to direct every schedule bank to maintain with it. [...]
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