CRR full form in banking is Cash Reserve Ratio. It is a mandatory requirement set by the Reserve Bank of India (RBI) that instructs banks to keep a certain percentage of their total deposits (NDTL – Net Demand and Time Liabilities) as cash reserves with the RBI. This amount cannot be used for lending or investment. CRR acts as a crucial monetary tool to maintain liquidity and control inflation in the Indian economy.
What Is CRR in Banking?
The Cash Reserve Ratio ensures that banks always maintain adequate cash reserves to meet withdrawal demands from customers.
For example, if CRR is 4%, a bank must keep ₹4 out of every ₹100 of deposits with the RBI. This money remains idle and earns no interest for the bank, making CRR an effective instrument to regulate credit flow.
CRR is changed periodically by the RBI depending on the economic situation.
Objectives of CRR
1. Ensure Liquidity and Safety
CRR ensures banks have enough cash to meet sudden or large-scale withdrawals, preventing liquidity crises.
2. Control Inflation
If inflation is high, RBI increases CRR. This reduces the amount available with banks for lending, controlling money supply.
3. Maintain Financial Stability
By holding reserves with RBI, the banking system becomes more secure and less vulnerable to risks.
How CRR Works
- Banks calculate their NDTL daily.
- A fixed percentage of this amount is kept as cash with RBI.
- This reserve cannot be used for loans or investments.
- RBI adjusts CRR during monetary policy reviews to regulate liquidity.
Difference Between CRR and SLR
| CRR | SLR |
| Maintained only in cash with RBI | Maintained in cash, gold, and government securities |
| No interest earned | Some returns possible |
| Controls money supply | Ensures liquidity and investment discipline |
Importance of CRR in Banking
- Strengthens customer confidence
- Controls excessive lending
- Supports stable economic growth
- Helps RBI manage monetary policy
Conclusion
The Cash Reserve Ratio (CRR) is a vital tool used by the RBI to ensure liquidity, maintain financial discipline, and regulate credit flow in the Indian banking system. By adjusting CRR, the RBI can influence inflation, stabilize banks, and support the overall economic structure of the country.