Full Form of CRR

The full form of CRR is the Cash Reserve Ratio. CRR refers to the share of the total deposit by the commercial banks which they have to keep with the central bank in the form of liquid cash, and it acts as a tool used by the central bank to control liquidity in the banking system.

1. The cash reserve ratio or CRR is the total deposits that commercial banks keep aside with the RBI to fend during emergencies, bankruptcy, or unpredictable contingencies.
2. The banks deposit the amount in the form of liquid cash, which also maintains the money flow in the economy. CRR is the rate that influences the interest rates in the economy.
3. SLR, or Statutory Liquidity Ratio, is the money invested by RBI in various securities. So basically, banks earn through this ratio.
4. CRR and SLR are important ratios that ensure money flows smoothly in the country. 

Following are important objectives of CRR:

• It is to regulate the money flow in the economy. The CRR policy of the central bank determines how much the money will flow in the whole economy.
• These policies help to maintain liquidity in the economy. Whenever a country's economy faces a liquidity crunch, the cash reserve ratio is reduced by the country's central bank. Incidentally, banks all around the country can lend more money to customers. Therefore, more money will be available to the general public for expenses, and hence, liquidity issues will be balanced in the economy.
• They make sure that the banks maintain the solvency position. Rather than lending out the total cash available with the banks, some portion of the ratio of total cash available is reserved or set aside.

The following is the formula to calculate the Cash reserve ratio:

Where,

• Reserve Requirement = Reserve requirement refers to the cash reserve that the bank must maintain with the central bank.
• Bank Deposits refer to the overall deposits of the bank.

Let’s take an example of a bank with total deposits of $1,500 billion in its annual report as of December 31, 2019. Now, the reserve requirement of the Federal Reserve, i.e., the cash reserve ratio, is 9%. So, calculate the bank's cash reserve requirement for the year 2019.

Solution:

In the present case, it is given that as of December 31, 2019,

• Total deposits of bank = $1,500 billion
• Cash reserve ratio = 9%

Now according to the formula, the reserve requirement will be calculated as:

• Reserve Requirement = 1,500  *  9%
• Reserve Requirement = $135 billion

Thus, the bank's cash reserve requirement for 2019 is $135 billion.

The cash reserve ratio directly impacts the interest rate in the economy. If the central bank increases the CRR requirements of the bank, then it will lower the lending requirement of the bank; therefore, it will not be able to lend more, and hence the rule of demand and supply will apply here. With lower lending capacity, the lending rate will rise, and the expense of borrowing will increase. On the other hand, banks will encourage people to provide more and more deposits and attract them; the deposit rate will be reduced. Therefore, the interest rate in the economy will fluctuate.

The cash reserve ratio lays a foundation for the better functioning of the banking industry. The following are the main importance of the Cash Reserve Ratio:

• The CRR ratio is the minimum proportion of the cash reserve that a bank will need to set aside to maintain the required amount of solvency.
• It is a very small portion of liquid funds against all the bank deposits.
• It helps the central bank to administer the rate and the average overall amount of liquidity in the entire country.
• It is the right portion of the money that a bank must set aside. Based on the rate of inflation and money flow in the economy, it is determined and is changed from time to time as per the need in the economy.

• The cash reserve ratio and statutory liquidity ratio are two different central bank policies. However, both are compulsory requirements for every bank.
• CRR is a certain percentage of total bank deposits required in the central bank's current account. Banks have no access to this amount for any economic or commercial activity, and a bank can not lend this money to any lenders; neither can they use it for investment purposes.
• On the other hand, SLR is the money invested in various specified securities of the central government. It is a certain percentage of the total bank deposit. Banks can earn interest on SLR investment as against CRR.

The following are the benefits of the Cash Reserve Ratio:

• It is a primary way of controlling the money supply in the economy. The strong and competitive money supply of the economy will help maintain a strong credit system.
• Commercial banks can maintain a good solvency ratio for commercial and other banks.
• Whenever there is a surplus money situation in the economy, funds can be easily migrated through CRR.

The following are the disadvantages of the Cash Reserve Ratio:

• A frequent change in the CRR may adversely affect a healthy economic environment.
• It is the amount set aside in the current account of the central bank. Hence banks don't earn any interest on the same, not even gain the inflation portion.
• It reduces the bank's lending capacity and stops them from earning the maximum profit.

CRR is the abbreviation used for Cash Reserve Ratio. The portion of the commercial bank's total deposits is compulsory for it to maintain with the country's central bank in the form of the cash reserve. Out of this reserve requirement, money cannot be used for any commercial lending. Therefore, it is a primary way of controlling the money supply in the economy.

This has guided the Full Form of CRR (Cash Reserve Ratio) and its meaning. Here we discuss examples of CRR along with the impact and differences between SLR and CRR. You may refer to the following articles to learn more about finance –

• CRR and SLR
• Bank Capital Definition
• Tier 2 Capital Meaning
• Risk-Weighted Asset