The rate of this CRR is to be fixed by RBI to avoid such situations where the banks cannot meet repayments due to a shortage of funds.
How Does Cash Reserve Ratio Work:
When the RBI decides to increase the CRR, the available amount of money with the banks reduces. This is the way of RBI's way that to be controlling the excess flow of money in the economy. The cash balance is to be maintained by scheduled banks with the RBI should not be less than 4% of the total NDLT. The NDLT refers to the total demand and time liabilities that are held by the banks which includes the deposits of the general public and the balances held by the bank with other banks.
Advantages of CRR:
CRR can help commercial banks to build and sustain their solvency position. RBI is to be gets to control and coordinate the credit that to be maintained by banks through the CRR rate which helps to a smooth supply of cash and credit in the economy. When the CRR rate is reduced by RBI, the commercial banks which turn increase the flow of cash to the public. It helps to improve declining rates by absorbing the liquidity when the market interest rates go down instantly.
Need for banks to maintain CRR:
The cash flow of the economy is to be constantly worked and monitored by RBI. The overall liquidity is to be managed thoroughly when all the commercial banks maintain the necessary CRR rate then which benefits each bank. The CRR helps banks hold the right amount of funds with them and never fall short of it when needed by their depositors for personal needs.
The CRR is to be used as a monetary policy tool by the central bank to influence the country's interest and borrowing rates by altering the available funds for banks to make loans with. When the government needs to pump funds into the system, then lowers the CRR rate which in turn helps the banks that provide loans to a large number of businesses and industries for investment purposes.
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