Understanding the term ‘Cash Reserve Ratio’

In India the banks need to keep only a fraction of their deposit liabilities in the form of liquid cash with the central bank for ensuring safety and liquidity of deposits therefore the present banking system is called a “fractional reserve banking system”.

The Cash Reserve Ratio (CRR) means to the liquid cash that banks have to maintain with the Reserve Bank of India (RBI) as a certain percentage of their demand and time liabilities. For instance if the CRR is 10% then a bank with net demand and time deposits of Rs 1,00,000 will be required to deposit Rs 10,000 with the RBI as liquid cash.

In 1950 CRR was introduced mainly as a measure to ensure safety and liquidity of bank deposits, but over the years it being used an important and effective tool for directly regulating the lending capacity of banks and to keep control on the money supply in the economy.

When the RBI sees that the money supply is increasing which in turn is creating an upward pressure on inflation, the RBI increases the CRR thus reducing the deposits available with banks to plan loans and hence reducing the money supply and inflation.

The RBI can impose penal interest rates on the banks in respect of their discrepancy in the prescribed CRR. The Master Circular on maintenance of statutory reserves updated up to June 2008, states that in case of default in maintenance of CRR requirement on daily basis, which is currently 70 per cent of the total CRR requirement, then the penal interest will be recovered at the rate of three 3% per annum which is above the bank rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day.

In case the shortfall continues on the next succeeding days, penalty interest rate will be recovered at a rate of 5% per annum above the bank rate. In fact if the default persists on a regular basis then RBI can even cancel the bank’s license or force it to merge with a larger bank.

The CRR is valid for all scheduled banks including the scheduled cooperative banks and the Regional Rural Banks (RRBs). Currently the level of CRR is 6.5%, this is fixed by the central bank of India. Earlier, there was a level of 3% and ceiling of 20% on the CRR, but since 2006 RBI has removed the minimum or maximum levels of CRR.

Currently RBI is not paying any interest to the banks on the CRR deposits. Up to 1962, a separate CRR was fixed in respect of demand and time liabilities, eventually after 1962 the separate CRRs were merged and one CRR was introduced for both demand and time deposits of banks with RBI.

Dena bank hiked rates on deposits and offer 10.25% on 700-day term deposit

Dena Bank a public sector lender on Monday announced interest rate of 10.25 per cent per annum on domestic term deposits of 700 days. A bank press release said senior citizens will be offered interest of 10.75 per cent per annum for the same period.

According to press release bank will also be revising interest rates on NRE rupee term deposits on maturity period of one year and above but less than two years where the new interest rate will be 4.46 per cent as against the earlier 3.17 per cent.

The release also stated that bank has also raised its interest rates on FCNR (B)/RFC term deposits in dollar (USD), Pound (GBP), Euro, Canadian (CAD) and Australian (AUD) dollars for the maturity period of one year and above but less than two years.

Thus the increased interest rate on dollar in this tenure will be 3.71 per cent as against the earlier 2.96 per cent, on GBP it will be 6.27 per cent as against the earlier 5.77 per cent whereas on the Euro it will be 5.24 per cent as against 5.08 per cent.

On CAD, the bank has fixed the at 4.55 per cent as against the earlier 3.42 per cent and on AUD at 7.55 per cent as against the earlier 7.22 per cent.