CRR Full-form- What is the Full Form of CRR?

CRR full form is Cash Reserve Ratio and it refers to the RBI deposit that a bank needs to hold as liquid cash. The Reserve bank in India uses this deposit to control liquidity in the banking system. CRR is regarded as a curtail tool with which RBI ensures the country’s economy never faces a liquidity crunch. Banks must keep the CRR portion without using it to lend loans to customers. 

What is CRR Full Form?

As discussed above, CRR full form is Cash Reserve Ratio. The RBI formulates rules to set the CRR percentage. The Reserve Bank of India keeps a portion aside to utilize when an urgent need arises. According to the policies formulated by the central bank, commercial banks are required to keep at least 4% of the Net Demand and Time Liabilities (NDTL) in liquid form whenever the CRR rate is 4%. 

CRR is like security money the RBI keeps out of the bank’s total capital. CRR is often used as a weapon at the time of inflation or any other economic turmoil. Suppose there's an economic expansion, and RBI increases the cash reserve ratio rate. This article will offer detailed insight into the working of CRR and its significance in strengthening the country's economy.

Overview of CRR

What are the Primary Objectives of the Cash Reserve Ratio (CRR full form)?

The Cash Reserve Ratio serves certain purposes of the banking system and also offers a boost to the country's economy. Below we have mentioned some of the primary objectives with which the central bank set the CRR percentage. 

• CRR is a powerful tool that ensures the economy has a sufficient flow of liquid cash. The central bank minimizes the CRR rates to foster economic growth.
• Availability of funds to customers whenever a need arises is managed by the minimum deposit banks keep. It is the most effective way to meet the sudden growing demands of customers.
•  When it comes to controlling inflation, RBI increases the cash reserve ratio percentage so that banks have comparatively lesser amounts to lend to the people.
• CRR acts as a security deposit for commercial banks so that in situations of lending more money to customers, it can be properly used.

How To Calculate the CRR?

Generally, the cash reserve ratio is calculated based on the NDTL percentage that refers to the bank’s total demand and time liabilities. NDTL is basically the total deposits of a bank with the public. Commercial banks have liability in the following forms:

• Time liabilities include cash certificates, fixed deposits or gold deposits.
• Demand liabilities like DDs, current deposits or cash certificates
• Other liabilities include dividends, deposit interest etc.

To calculate CRR, a simple formula is used i.e.

CRR= (Liquid cash/NDTL)*100

How Does the CRR Work?

RBI fluctuates the cash reserve ratio (CRR full form) according to the economic situation. If central banks increase the CRR, the money that a bank holds reduces. To ensure monetary flow is regulated and maintained properly, banks must keep the cash deposits to 4% of the total NDTL. The net demand and Time Liabilities take into consideration the cash deposits of the general public, and balances that a bank keeps in other banks; hence CRR is fixed based on NDTL. 

It can be said that there's an inverse relationship between CRR and NDTL. With the increase in the CRR, banks have lower amounts available for lending or investing. The cash reserve ratio never remains the same, instead, it keeps changing as per the market situation. A bank’s low lending capacity is indicated by an increase in the cash reserve ratio rates. Generally, a low CRR proves helpful for banks as they get more borrowing power from customers. 

Why is the CRR Vital for the Nation's Economic Growth?

The Reserve Bank of India fixes the cash reserve ratio to maintain a supply of liquid money in the economy. According to monetary policy, CRR is considered to be a major component helping control inflation and maintain a cash supply chain. At the time of inflation, the central bank aims at increasing the reserve rates. 

With an increase in CRR rates, banks are not able to lend money for offering loans to customers which enables them to slow down the cash flow, therefore, allowing the economy to survive inflationary circumstances. Similarly, during deflation, the cash reserve rates are reduced to pump funds into the banking system. This allows banks to lend large amounts to businesses or individuals thereby boosting the cash supply in the economy.

How is CRR Different from SLR?

As part of the central bank’s monetary policies to administer economic growth, the cash reserve ratio and statutory liquidity ratio are the two main weapons adopted. SLR refers to the cash invested in different securities of the central government; commercial banks can earn interest on the statutory liquidity ratio against the CRR, full form of which is cash reserve ratio.

Let’s learn the major difference between the two important components of monetary policy.

What are the Benefits and Limitations of CRR?

The cash reserve ratio (CRR full form) serves as a helpful tool in managing the circulation of money in the economy. Dealing with economic crises like inflation, central banks suddenly increase the CRR rate so that borrowing of people can be lowered. Besides this, CRR offers a lot of advantages which will be discussed below.

Benefits 

• The Cash Reserve Ratio enables commercial banks to survive and sustain their solvency position.
• With a lowering of CRR rates, banks get a chance to borrow maximum cash and advances to the customers thereby enhancing cash flow in the economy.
• At times when interstate rates depreciate, CRR absorbs liquidity thereby, improving the declining rate.

Limitations

• CRR somehow restricts banks from lending more to the public.
• When the central bank continuously keeps fluctuating the reserve rates, the country’s economy might face adversity.
• As the cash reserve ratio (CRR full form) is the amount set aside by banks for RBI, they don’t earn any interest on the amount.