{"id":11794,"date":"2023-03-13T12:05:02","date_gmt":"2023-03-13T06:35:02","guid":{"rendered":"https:\/\/razorpay.com\/blog\/?p=11794"},"modified":"2023-03-15T12:14:50","modified_gmt":"2023-03-15T06:44:50","slug":"cash-reserve-ratio","status":"publish","type":"post","link":"https:\/\/razorpay.com\/blog\/business-banking\/cash-reserve-ratio\/","title":{"rendered":"Importance of Cash Reserve Ratio"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Cash Reserve Ratio<\/span> <span style=\"font-weight: 400;\">(CRR) falls among RBI monetary policies. RBI uses this monetary tool to curb liquidity risks and regulate cash flow in the Indian economy. Cash Reserve Ratio requires banks to keep a certain percentage of their share as a deposit that is to be maintained by the RBI as a reserve in form of liquid cash.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To know the ins and outs of CRR (Cash Reserve Ratio), go through the following sections.<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69d7b4ad6adeb\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69d7b4ad6adeb\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-reserve-ratio\/#What_Is_Cash_Reserve_Ratio_and_How_Does_It_Affect_the_Economy\" >What Is Cash Reserve Ratio and How Does It Affect the Economy?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-reserve-ratio\/#Importance_of_Cash_Reserve_Ratio\" >Importance of Cash Reserve Ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-reserve-ratio\/#Objectives_of_Cash_Reserve_Ratio\" >Objectives of Cash Reserve Ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-reserve-ratio\/#Advantages_of_Cash_Reserve_Ratio\" >Advantages of Cash Reserve Ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-reserve-ratio\/#Difference_between_Statutory_Liquidity_Ratio_Vs_Cash_Reserve_Ratio\" >Difference between Statutory Liquidity Ratio Vs Cash Reserve Ratio\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/blog\/business-banking\/cash-reserve-ratio\/#Frequently_Asked_Questions\" >Frequently Asked Questions<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What_Is_Cash_Reserve_Ratio_and_How_Does_It_Affect_the_Economy\"><\/span><b>What Is Cash Reserve Ratio and How Does It Affect the Economy?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The cash reserve ratio is a percentage of cash that a bank must keep in reserves against its total deposit. The Reserve Bank of India uses CRR in order to ensure robust financial management which regulates liquidity and slows investment.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Cash Reserve Ratio (CRR) is a key component of the monetary policy of RBI. Besides regulating the inflation level, it also manages cash supply and liquidity; hence has a significant impact on the Indian economy. The higher the CRR rate, the lower the liquidity with all banks.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, it is important to note that the CRR amount cannot be lent to individual borrowers or business bodies, and neither the amount can be used for investment purposes. Further, financial institutions do not earn any interest on the cash that is parked with RBI.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This monetary tool applies to all commercial banks. However, it does not apply to RRB (Regional Rural banks) or NBFCs. CRR influences the pattern following which banks extend credit options. It plays an important role for both financial institutions and depositors.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Importance_of_Cash_Reserve_Ratio\"><\/span><b>Importance of Cash Reserve Ratio<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">RBI increases the CRR if the inflation level is high. In this scenario, banks cannot lend funds which in turn lowers the investment spree and reduces the cash flow in the economy. Conversely, RBI lowers the CRR rate when there is a need to inject funds into the financial market. It helps banks offer loans to borrowers, industries or business bodies. Reducing the reserve cash ratio improves cash flow and strengthens the economy.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Maximum lending will help banks achieve higher profitability. However, in pursuit of making more profit, banks might lend out maximum money and face a cash crunch. If there is a higher rate of withdrawal in such situations, banks will not be able to cater to the repayment needs of customers. This is where CRR proves to be extremely effective. RBI fixes this monetary tool to mitigate such scenarios and ensures that banks always have a fraction of all deposits.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Objectives_of_Cash_Reserve_Ratio\"><\/span><b>Objectives of Cash Reserve Ratio<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Here are the major objectives of Cash Reserve ratio.<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The main objective of the Cash Reserve Ratio (CRR) is to control inflation. RBI, in a high inflation scenario, increases the cash reserve ratio to stop banks from lending.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">CRR is implemented to ensure that the banks never run out of cash to cater to the payment demands of depositors. In simple words, it works as a safety net for depositors. Regardless of the bank\u2019s performance, it ensures the depositors that a percentage of their cash is secured with RBI.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This monetary tool is also used as a reference rate for loans, which is termed as the base rate.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It also ensures that banks have a minimum amount of money that can be extended to customers during massive demand.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">CRR regulates cash flow and boosts the economy.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Besides ensuring liquidity, CRR has an equal role in regulating interest rates levied by banks on the loan. By adjusting liquidity, the Reserve Bank of India regulates short-term volatility.\u00a0<\/span><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Advantages_of_Cash_Reserve_Ratio\"><\/span><b>Advantages of Cash Reserve Ratio<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Let&#8217;s have a look at the advantages of Cash Reserve Ratio.<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The cash reserve ratio ensures a consistent and regulated liquidity system in every commercial bank.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It also absorbs liquidity when the interest rate prevailing in the market drops drastically, thereby helping in uplifting the declining rate.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">CRR aids commercial banks to sustain their solvency position.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">As RBI controls the credit that banks must have through the CRR rate, it helps to ensure a seamless cash supply in the economy.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">As a depositor, it is imperative to know the prevailing CRR.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Difference_between_Statutory_Liquidity_Ratio_Vs_Cash_Reserve_Ratio\"><\/span><b>Difference between Statutory Liquidity Ratio Vs Cash Reserve Ratio\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<table>\n<tbody>\n<tr>\n<td><b>Statutory Liquidity Ratio<\/b><\/td>\n<td><b>Cash Reserve Ratio<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">SLR (Statutory Liquidity Ratio) encompasses liquid assets (bonds, gold, government securities etc.)<\/span><\/td>\n<td><span style=\"font-weight: 400;\">As the name suggests, the cash reserve ratio includes only cash reserves.\u00a0<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Banks do earn interest on assets reserved as SLR.<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Banks do not earn any interest on the fund parked as CRR.\u00a0<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">In SLR, securities are maintained by the financial institutions themselves.<\/span><\/td>\n<td><span style=\"font-weight: 400;\">CRR amount is kept with the RBI.<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">This monetary tool is used to regulate the leverage of banks for credit expansion.\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">CRR, on the other hand, regulates liquidity in the banking system<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Banking has faced prominent evolution. From traditional banking to neo-banking the evolution of the fintech space has had a significant impact on businesses today.<\/span><\/p>\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/?r=blog_cta_business_banking_cash_reserve_ratio&amp;utm_source=blog&amp;utm_medium=cta\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Explore RazorpayX<\/a><\/div>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"https:\/\/razorpay.com\/x\"><span style=\"font-weight: 400;\">RazorpayX<\/span><\/a><span style=\"font-weight: 400;\"> allows business owners to open<\/span><a href=\"https:\/\/razorpay.com\/x\/current-accounts\/?utm_source=direct&amp;utm_medium=website\"><span style=\"font-weight: 400;\"> current accounts<\/span><\/a><span style=\"font-weight: 400;\">,<\/span><a href=\"https:\/\/razorpay.com\/x\/tax-payments\/\"><span style=\"font-weight: 400;\"> pay taxes<\/span><\/a><span style=\"font-weight: 400;\">, schedule payments,<\/span><a href=\"https:\/\/razorpay.com\/x\/vendor-payments\/\"><span style=\"font-weight: 400;\"> pay vendors<\/span><\/a><span style=\"font-weight: 400;\"> seamlessly and check invoices from a single dashboard. This saves valuable time and effort.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It fills the gap between advanced banking solutions and finance professionals. It allows easy accounting software integration.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">With<\/span><a href=\"https:\/\/razorpay.com\/payroll\/\"><span style=\"font-weight: 400;\"> RazorpayX Payroll<\/span><\/a><span style=\"font-weight: 400;\">, businesses can automate salary payments and provide insurance policies to their employees.<\/span><\/li>\n<\/ul>\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/?r=blog_cta_business_banking_cash_reserve_ratio&amp;utm_source=blog&amp;utm_medium=cta\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Explore RazorpayX-powered Current Account<\/a><\/div>\n<h2><span class=\"ez-toc-section\" id=\"Frequently_Asked_Questions\"><\/span>Frequently Asked Questions<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<div id=\"rank-math-rich-snippet-wrapper\"><div id=\"rank-math-faq\" class=\"rank-math-block\">\n<div class=\"rank-math-list \">\n<div id=\"faq-1\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \">Why is Cash Reserve Ratio (CRR) changed periodically?<\/h3>\n<div class=\"rank-math-answer \">\n\n<p>CRR caters to the dynamics of the economy. Hence, depending on the flow of cash in the Indian economy, RBI has to change the cash reserve ratio at regular intervals. A slight change in the CRR will impact the economy.<\/p>\n\n<\/div>\n<\/div>\n<div id=\"faq-2\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \">What is the formula used for evaluating the cash reserve ratio?<\/h3>\n<div class=\"rank-math-answer \">\n\n<p>CRR is evaluated as a percentage of the bank's net demand liabilities and time liabilities. The formula used for cash reserve ratio is-<br \/>\nCash reserve ratio (CRR) = (Liquid cash \/ NDTL) * 100 <\/p>\n\n<\/div>\n<\/div>\n<div id=\"faq-3\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \">Why do individuals avoid borrowing from banks when CRR is increased?<\/h3>\n<div class=\"rank-math-answer \">\n\n<p>Banks have low lending capacity when RBI increases the cash reserve ratio. Low lending potential prompts banks to raise the interest rate. Higher interest rate results interest payments and loans to be on the expensive side. Hence, borrowers avoid applying for a loan when CRR is increased.<\/p>\n\n<\/div>\n<\/div>\n<\/div>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Cash Reserve Ratio (CRR) falls among RBI monetary policies. RBI uses this monetary tool to curb liquidity risks and regulate cash flow in the Indian economy. Cash Reserve Ratio requires banks to keep a certain percentage of their share as a deposit that is to be maintained by the RBI as a reserve in form<\/p>\n","protected":false},"author":102,"featured_media":11799,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[27],"tags":[],"class_list":{"0":"post-11794","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business-banking"},"_links":{"self":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts\/11794","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/users\/102"}],"replies":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/comments?post=11794"}],"version-history":[{"count":0,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/posts\/11794\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/media\/11799"}],"wp:attachment":[{"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/media?parent=11794"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/categories?post=11794"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/razorpay.com\/blog\/wp-json\/wp\/v2\/tags?post=11794"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}