CRR

CRR stands for cash reserve ratio. It is one of two reserve rules for Indian banks. The other is the statutory liquidity ratio (SLR), which requires banks to hold a share of the same liabilities in safe liquid assets, mainly government securities. The difference matters: SLR securities earn interest, CRR balances earn nothing.

What NDTL means

Net demand and time liabilities are mostly deposits. Demand liabilities are payable on demand, such as current and savings account balances. Time liabilities are payable after a period, such as fixed and recurring deposits. Some balances with other banks are netted off, which is where the word net comes from. Banks report NDTL to the RBI every fortnight and must keep the required CRR balance on average over each fortnight, with a minimum on every single day.

Why the RBI changes it

The repo rate changes the price of money. The CRR changes the quantity. A CRR cut releases cash that banks can lend at once, so the RBI uses it when liquidity in the banking system stays tight. A CRR increase locks money away, which the RBI can use when there is too much liquidity, for example after large foreign inflows. Changes are often phased in over several fortnights so the system can adjust.

What it means for bank profits

Money held under the CRR earns nothing, yet the bank still pays interest on the deposits behind it. The CRR is therefore a cost, and a cut lifts a bank's net interest margin slightly, because the released money moves into loans or securities that do earn interest. The effect is larger for banks that rely on costly deposits. The analysis of bank margins shows how the other parts of a margin move.

Where to find it

The RBI announces changes in its monetary policy statements and shows the rates in force on its website. A bank's balance sheet shows the money it holds with the RBI under cash and balances with the Reserve Bank of India.

Common mistakes

• Treating CRR and SLR as the same rule. One is idle cash with the RBI, the other is interest-earning securities the bank holds itself.
• Reading a CRR cut as a rate cut. It changes liquidity, not the policy rate, though more liquidity can push market rates down.
• Applying the ratio to deposits alone. It applies to NDTL, which includes some other liabilities.

Questions investors ask

What is the current CRR? Check the RBI's website, which shows the policy and reserve rates in force. This page does not quote the number because it can change at any policy meeting.

How is CRR calculated? Multiply the CRR by the bank's NDTL for the fortnight. The example below works through the numbers.

Why does a CRR cut matter if the repo rate is unchanged? Because it gives banks more money to lend immediately, which can lower lending and market rates even without a change in the policy rate.