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

II RBI decides to increase the percent oI

this, the available amount with the banks comes down. RBI is using this method (increase oI CRR rate), to drain out the
excessive money Irom the banks.RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate
or ceiling rate.
RBI uses CRR either to drain excess liquidity or to release Iunds needed Ior the growth oI the economy Irom time to time.
Increase in CRR means that banks have less Iunds available and money is sucked out oI circulation. Thus we can say that this
serves duel purposes i.e.
(a) ensures that a portion oI bank deposits is kept with RBI and is totally risk-Iree,
(b) enables RBI to control liquidity in the system, and thereby, inIlation by tying the hands oI the banks in lending money.
CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion oI their deposits in the Iorm oI cash.
However, actually Banks don`t hold these as cash with themselves, but deposit such case with Reserve Bank oI India (RBI) /
currency chests, which is considered as equivlanet to holding cash with RBI. This minimum ratio (that is the part oI the total
deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. Thus, When a bank`s
deposits increase by Rs100, and iI the cash reserve ratio is 6, the banks will have to hold additional Rs 6 with RBI and Bank
will be able to use only Rs 94 Ior investments and lending / credit purpose. ThereIore, higher the ratio (i.e. CRR), the lower is
the amount that banks will be able to use Ior lending and investment. This power oI RBI to reduce the lendable amount by
increasing the CRR, makes it an instrument in the hands oI a central bank through which it can control the amount that banks
lend. Thus, it is a tool used by RBI to control liquidity in the banking system
How is CRR used as a tool of credit control?
CRR was introduced in 1950 primarily as a measure to ensure saIety and liquidity oI bank deposits, however over the years it has
become an important and eIIective tool Ior directly regulating the lending capacity oI banks and controlling the money supply in
the economy. When the RBI Ieels that the money supply is increasing and causing an upward pressure on inIlation, the RBI has
the option oI increasing the CRR thereby reducing the deposits available with banks to make loans and hence reducing the money
supply and inIlation.

Does RBI impose on penalty on banks for defaulting on CRR deposits?
The RBI has the authority to impose penal interest rates on the banks in respect oI their shortIalls in the prescribed CRR.
According to Master Circular on maintenance oI statutory reserves updated up to June 2008, in case oI deIault in maintenance oI
CRR requirement on daily basis, which is presently 70 per cent oI the total CRR requirement, penal interest will be recovered at
the rate oI three 3 per annum above the bank rate on the amount by which the amount actually maintained Ialls short oI the
prescribed minimum on that day. II shortIall continues on the next succeeding days, penal interest will be recovered at a rate oI
5 per annum above the bank rate. In Iact iI the deIault continues on a regular then RBI can even cancel the bank`s licence or
Iorce it to merge with a larger bank.