Economics • Banking & FinanceMedium
What is the statutory requirement mandated by the Cash Reserve Ratio (CRR) for scheduled commercial banks in India?
A. Maintaining a specified percentage of total demand and time liabilities in unencumbered government securities
B. Keeping a specified minimum percentage of net demand and time liabilities as liquid cash reserves with the Reserve Bank of India✓ Correct Answer
C. Allocating a fixed proportion of total credit advances to priority sectors such as agriculture and micro enterprises
D. Holding a mandatory capital buffer against risk-weighted assets under international Basel accords
💡 Solution & Explanation
The Cash Reserve Ratio mandates that scheduled commercial banks maintain a specified percentage of their net demand and time liabilities as cash reserves with the Reserve Bank of India. Banks do not earn any interest on the balances maintained under the CRR requirement. By altering the cash reserve ratio, the central bank can swiftly influence the lending capacity of commercial banks and manage broad money supply. The statutory basis for CRR is enshrined in Section 42 of the Reserve Bank of India Act, 1934. A related statutory ratio is the Statutory Liquidity Ratio, which requires banks to maintain liquid assets in their own vaults.
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