Cash Reserve Ratio (CRR)
Cash Reserve Ratio (CRR) is the amount of funds that all Scheduled Commercial Banks (SCB) must maintain with RBI. Regional Rural Banks (RRB) are exempted from maintaining Cash Reserve Ratio. CRR does not carry any floor (minimum) or ceiling (maximum) rate, as at present.
Purpose of Maintenance of CRR
Maintenance of CRR is stipulated for ensuring the liquidity and solvency of Banks. Section 42 (1) of RBI Act 1934 empowers RBI to announce the CRR to be maintained from time to time. CRR is to be maintained in relation to the net Demand and Time Liabilities (DTL) of the Bank. By altering the percentage of CRR to be maintained, RBI can alter the position of liquidity in market. As CRR increase higher amount is required to be blocked with RBI and lesser amount only will be available with banks for lending.
RBI uses CRR along with Statutory Liquidity Ratio (SLR) to maintain sufficient liquidity in the market and control inflation.
Demand and Time Liabilities
Demand Liabilities are those liabilities which are payable on demand and Time Liabilities are those which are payable otherwise than on demand. The components of DTL include Demand Liabilities (DL), Time Liabilities (TL) and Other Demand & Time Liabilities (ODTL).
Please refer article Demand and Time Liabilities (DTL) & Net Demand and Time Liabilities (NDTL) for the full list of items coming under Demand Liabilities (DL), Time Liabilities (TL) and Other Demand & Time Liabilities (ODTL).
Liabilities not included under DTL/ODTL for CRR
Scheduled Commercial Banks need not take the following liabilities for the purpose of maintenance of CRR
a) Paid up capital, reserves, credit balance in the Profit & Loss Account, loan taken from the RBI, refinance taken from Exim Bank, NHB, NABARD, SIDBI;
b) Net income tax provision;
c) Amount received from DICGC towards claims pending adjustments thereof;
d) Amount received from ECGC
e) Amount received from insurance company on ad-hoc settlement of claims pending judgment of the Court;
f) Amount received from the Court Receiver;
g) The liabilities arising on account of utilization of limits under Bankers Acceptance Facility (BAF);
h) District Rural Development Agency (DRDA) subsidy of Rs.10, 000/- kept in Subsidy Reserve Fund account in the name of Self Help Groups.
i) Subsidy released by NABARD under Investment Subsidy Scheme for Construction/Renovation/Expansion of Rural Godowns;
j) Net unrealized gain/loss arising from derivatives transaction under trading portfolio;
k) Income flows received in advance such as annual fees and other charges which are not refundable.
l) Bill rediscounted by a bank with eligible financial institutions as approved by RBI and,
(m) Provision not being a specific liability arising from contracting additional liability and created from profit and loss account.
Exempted Categories of Liabilities for CRR maintenance
Scheduled Commercial Banks permitted to exempt the following liabilities for the purpose of maintenance of CRR
a) Liabilities to the banking system in India
b) Credit balances in ACU (US$) Accounts;
c) Demand and Time Liabilities in respect of their Offshore Banking Units (OBU)
d) The eligible amount of incremental FCNR (B) and NRE deposits of maturities of three years and above from the base date of July 26, 2013, and outstanding as on March 7, 2014, till their maturities/pre-mature withdrawals, and
e). Minimum of Eligible Credit (EC) and outstanding Long term Bonds (LB) to finance Infrastructure Loans and affordable housing loans.
Procedure and maintenance of CRR
As a measure of simplification, a lag of one fortnight in the maintenance of stipulated CRR by SCBs has been introduced. All SCBs are required to maintain minimum CRR balances up to 95 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight. Reserve Bank does not pay any interest on the CRR balance maintained by SCBs.
All SCBs are required to submit to RBI a provisional Return in Form ‘A’ within 7 days from the expiry of the relevant fortnight. The final Form ‘A’ Return must be submitted within 20 days from expiry of the relevant fortnight.
Penalty for non-maintenance of Cash reserve Ratio
1. Default in maintenance of CRR requirement on a daily basis (presently 95% of the total requirement) by SCBs attracts penal interest for that day at 3% above Bank Rate on the short fall.
2. In case the shortfall continues on the next succeeding day/s, penal interest at the rate of 5% p.a. above the Bank Rate is applicable.
3. In cases of default in maintenance of CRR on average basis during a fortnight, penal interest will be recovered as envisaged in sub-section (3) of Section 42 of Reserve Bank of India Act, 1934.
4. SCBs are required to furnish the particulars such as date, amount, percentage, reason for default in maintenance of requisite CRR and also action taken to avoid recurrence of such default.
