cash reserve ratio

CASH RESERVE RATIO

TOPICS

CRR

FACTS & HISTORY OF CRR

COMPUTATION OF CRR

CRR OF DIFFERENT COUNTRIES

OBJECTIVES OF CRR

INCREASE IN CRR

DECREASE IN CRR

CONCLUSION

What is CRR ? ?

•It is bank regulation that sets the minimum reserves each bank must hold by way of customer deposits and notes.

•These deposits are designed to satisfy cash withdrawal demands of customers.

•Deposits are normally in the form of currency stored in a bank or with the central bank like the RBI.

•CRR is also called the liquidity ratio as it seeks to control money supply in the economy.

•RBI has monetary authority of regulation the CRR.

Conti…

CRR is used as a tool in monetary policy , influencing the country’s economy , borrowing and interest rates .

It works like brakes on the economy’s money supply.

CRR requirements affects the potential of the banking system to create higher or lower money supply.

How it affects the potential of banks? ?

Let us now understand how CRR requirements affects the potential of banks to create higher or lower money supply

Say if CRR is 10 %, RBI receives RS 100 as deposit , then they can lend RS 90 as a loan and will have to keep the balance as RS 10 in customer’s deposit account.

Now the borrower who has received RS 90 as a loan will deposit the same in his bank

The borrower's bank will now lend out RS 81 i.e. 90 % of 90 and keep RS 9 in his deposit account

As this process continues the banking system can expand the initial deposit of RS 100 into a maximum of RS 1000 ( RS 100 + RS 90 + RS 81 ….. + …. = RS 1000)

Conti..

Say if CRR is 20 %, RBI receives RS 100 as deposit , then they can lend RS 80 as a loan and will have to keep the balance as RS 20 in customer’s deposit account.

Now the borrower who has received RS 80 as a loan will deposit the same in his bank

The borrower's bank will now lend out RS 64 i.e. 80 % of 80 and keep RS 16 in his deposit account

As this process continues the banking system can expand the initial deposit of RS 100 into a maximum of RS 500( RS 100 + RS 80 + RS 64 ….. + …. = RS 500)

So. . .

Higher the cash reserve ratio required , the lower the money available for lending.

Every time the borrowed money comes into a deposit account of a customer , the bank has to mandatorily keep a part of it as reserves.

This reduces credit expansion by controlling the amount of money that goes out by way of loans.

This directly affects money creation process and in turn affects the economic activity.

Hence central bank in the world increase the requirement of cash reserves whenever they feel the need to control money supply.

FACTS about CRR

• Comes under subsection 42(1) of Reserve Bank of India• Firstly came into act in 1935• Depends on Demand Liabilities & Time Liabilities• Never remain constant • Earlier a min. 3% of total demand and time liabilities was mandatory

Historic records

Date from which Effective CRR as % age of NDTL Remarks

5-Jul-1935   (a) 5% of DL; (b) 2% of TL

6-Mar-1960   (a) 5% of DL; (b) 2% of TL)

6-May-1960   (a) 5% of DL; (b) 2% of

11-Nov-1960   (a)5% of DL; (b) 2% of TL

16-Sep-1962 3.00  

29-Jun-1973 5.00  

8-Sep-1973 6.00  

22-Sep-1973 7.00  

1-Jul-1974 5.00  

14-Dec-1974 4.50  

28-Dec-1974 4.00  

4-Sep-1976 5.00  

13-Nov-1976 6.00  

Date from which effective CRR % of NDTL

22-Nov-1986 9.00

28-Feb-1987 9.50

23-May-1987 9.50

24-Oct-1987 10.00

23-Apr-1988 10.00

2-Jul-1988 10.50

30-Jul-1988 11.00

1-Jul-1989 15.004-May-1991 15.00

11-Jan-1992 15.00(21-04-1992) 15.00

8-Oct-1992 15.0017-Apr-1993 14.50

15-May-1993 14.0011-Jun-1994 14.50

9-Jul-1994 14.756-Aug-1994 15.00

11-Nov-1995 14.50

Date from which effective CRR % of NDTL

22-Nov-1986 9.00

28-Feb-1987 9.50

23-May-1987 9.50

24-Oct-1987 10.00

23-Apr-1988 10.00

2-Jul-1988 10.50

30-Jul-1988 11.00

1-Jul-1989 15.004-May-1991 15.00

11-Jan-1992 15.00(21-04-1992) 15.00

8-Oct-1992 15.0017-Apr-1993 14.50

15-May-1993 14.0011-Jun-1994 14.50

9-Jul-1994 14.756-Aug-1994 15.00

11-Nov-1995 14.50

Date from which effective CRR % of NDTL

22-Jun-2006 5.00

23-Dec-2006 5.25

6-Jan-2007 5.50

17-Feb-2007 5.75

3-Mar-2007 6.00

14-Apr-2007 6.25

28-Apr-2007 6.50

4-Aug-2007 7.00

10-Nov-2007 7.50

26-Apr-2008 7.75

10-May-2008 8.00

24-May-2008 8.25

5-Jul-2008 8.50

19-Jul-2008 8.75

30-Aug-2008 9.00

11-Oct-2008 7.50

11-Oct-2008 6.50

25-Oct-2008 6.00

8-Nov-2008 5.50

17-Jan-2009 5.00

13-Feb-2010 5.50

27-Feb-2010 5.75

24-Apr-2010 6.00

28-Jan-2012 5.50

Date from which effective CRR % of NDTL

22-Jun-2006 5.00

23-Dec-2006 5.25

6-Jan-2007 5.50

17-Feb-2007 5.75

3-Mar-2007 6.00

14-Apr-2007 6.25

28-Apr-2007 6.50

4-Aug-2007 7.00

10-Nov-2007 7.50

26-Apr-2008 7.75

10-May-2008 8.00

24-May-2008 8.25

5-Jul-2008 8.50

19-Jul-2008 8.75

30-Aug-2008 9.00

11-Oct-2008 7.50

11-Oct-2008 6.50

25-Oct-2008 6.00

8-Nov-2008 5.50

17-Jan-2009 5.00

13-Feb-2010 5.50

27-Feb-2010 5.75

24-Apr-2010 6.00

28-Jan-2012 5.50

CURRENT CRR

4.75%

Preamble

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

-from www.rbi.org.in

Computation of Demand and Time Liabilities

Liabilities of a bank may be in the form of demand or time deposits or borrowings or other miscellaneous items of liabilities. As defined under Section 42 of RBI Act, 1934, liabilities of a bank may be towards banking system or towards others in the form of demand and time deposits or borrowings or other miscellaneous items of liabilities.

What are Demand Liabilities ? Demand Liabilities include all liabilities which are

payable on demand that include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs) {Outdated}, Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the Banking System should be shown against liability to others.

What are Time Liabilities ?

Time Liabilities are those which are payable otherwise than on demand that include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit, if not payable on demand, deposits held as securities for advances which are not payable on demand and Gold deposits.

Other Demand and Time Liabilities (ODTL)

Other Demand and Time Liabilities

(ODTL) include interest accrued on deposits, bills payable, unpaid dividends, any amounts due to the "Banking System" which are not in the nature of deposits or borrowing

Liabilities not to be included for DTL/NDTL computation

Liabilities not to be included for DTL/NDTL

computation The under-noted liabilities will not

form part of liabilities for the purpose of CRR; ▪ Paid up capital, reserves, any credit balance

in the Profit & Loss Account of the bank, amount of any loan taken from the RBI and the amount of refinance taken from, EXIM Bank,NABARD, SIDBI etc.

Liabilities not to be included for DTL/NDTL computation

▪ Scheduled Commercial Banks are not required to include inter-bank term deposits/term borrowing liabilities of original maturities of 15 days and above and up to one year in "Liabilities to the Banking System" ▪ Similarly banks should exclude their inter-

bank assets of term deposits and term lending of original maturity of 15 days and above and up to one year in "Assets with the Banking System" for the purpose of maintenance of CRR. ▪ The interests accrued on these deposits are

also exempted from reserve requirements.

Procedure for Computation of CRR In order to improve the cash management by banks,

as a measure of simplification, a lag of one fortnight in the maintenance of stipulated CRR by banks has been introduced with effect from the fortnight beginning November 06, 1999.

Maintenance of CRR on Daily Basis With a view to providing flexibility to banks in

choosing an optimum strategy of holding reserves depending upon their intra fortnight cash flows, all Scheduled Commercial Banks are required to maintain minimum CRR balances up to 70 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight with effect from the fortnight beginning December 28, 2002.

Does RBI impose penalty on banks for defaulting on CRR deposits?

The RBI has the authority to impose penal interest rates on the banks in respect of their shortfalls in the prescribed CRR. According to Master Circular on maintenance of statutory reserves updated up to June 2008, in case of default in maintenance of CRR requirement on daily basis, which is presently 70 per cent of the total CRR requirement, penal interest will be recovered at the rate of three 3% per annum above the bank rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day. If shortfall continues on the next succeeding days, penal interest will be recovered at a rate of 5% per annum above the bank rate. In fact if the default continues on a regular then RBI can even cancel the bank’s licence or force it to merge with a larger bank.

Does CRR apply to all scheduled banks?

The CRR is applicable to all scheduled banks including the scheduled cooperative banks and the Regional Rural Banks (RRBs).

The present level of CRR is 4.75%. Previously, there was a floor of 3% and ceiling of 20% on the CRR that could be imposed by the RBI; however since 2006 there is no minimum or maximum level of CRR that needs to be fixed by the central bank of India.

At present, the RBI does not pay any interest to the banks on the CRR deposits. Prior to 1962, a separate CRR was fixed in respect of demand and time liabilities, however after 1962 the separate CRRs were merged and one CRR came into effect for both demand and time deposits of banks with RBI.

Impact and understanding of Cash Reserve Ratio in the top 4 countries THAT MATTER!

Sample CRR data example

Data Courtesy: www.en.wikipedia.org

China

China is cutting the amount of money banks need to hold in reserve, freeing those funds to stimulate the Chinese economy.

UBS released a report that lowered their growth forecast for China next year to 8% from 8.3%.

India

• The central bank had cut CRR by 0.75 percent to 4.75 per cent. In January, too, RBI had reduced CRR by 0.50 percent to ease liquidity position in market.

• The SBI reduced interest rates on car and education loans and is making deep cuts in lending to SMEs.

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U.S.A. An institution that is a

member of the Federal Reserve System must hold its reserve deposits at a Federal Reserve Bank.

Of less than $11.5 million have no minimum reserve requirement. Between $11.5 million and $71.0 million must have a liquidity ratio of 3%.

Canada

• Mandated regulatory compliance on bank operations.

• Setup a depositor’s insurance fund that would refund deposits in the event of the bank becoming insolvent

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Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI.

Increasing the percent of this will drain out the money from the banks.

Hence take away the excess money from market.

Liquidity in an economy also gets impacted with a change in CRR.

INCREASE IN CRR AND LIQUIDITY

The Reserve Bank of India (RBI) can increase mandatory cash reserve of banks held by it by 75 basis points in a bid to suck excess liquidity to combat rising inflation.

The increase especially affect corporate lending and long term fundings.

CRR AND INFLATION

RBI is controlling the supply side of the Funds by changes in CRR .

When RBI increases CRR the available funds with the banks will go down and as demand remain the same then people will have to pay more as interest and interest rate will go up.

CRR AND INTEREST RATE

With the increase in the CRR, banks have to deposit more amount with the Central Bank.

Leads to Decreases money supply in the economy.

Curbs inflation.

Leads to decrease in the investments.

OVERALL IMPACT OF INCREASE IN CRR

Decrease in CRR

When CRR is 5% Suppose the NTDL = Rs 100Amount to be maintained as CRR = Rs 5 Amount bank can lend = Rs 100-Rs 5

=Rs 95 When CRR is 4% Suppose the NTDL = Rs 100Amount to be maintained as CRR = Rs 4 Amount bank can lend = Rs 100-Rs 4

=Rs 96

Impact of decrease on the economy

With the decrease in the CRR, banks have to deposit less amount with the Central Bank.

Increases money supply in the economy.

One of the causes of inflation. Leads to increase in the investments.

Recent Decrease and Impact

Earlier CRR was 5.50% w.e.f. 28-01-2012)

Present CRR is 4.75%(w.e.f. 10-03-2012)

This change of 50 points in CRR infused 48000 crores of money the economy.

Conclusion

Inflation and Growth Gold Problem Stock market Rupee Volatility

SOUND CRR POLICY HELPS TO STRENGTHEN THE ECONOMY

THANK YOU . . .

ASHWINI 33PRIYANK JAIN 34RIPPUDAMAN 35SURBHI CHOPRA 36ANANT LODHA 37MAYANK AGRAWAL 38BHANITA TALUKDAR 39