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Banking Awareness is considered to be the high scoring section in any competitive exam. It includes two main portions, current affairs GK and static GK. In this article, we will discuss some really important Banking Awareness topics that are covered in almost all competitive exams. Also, you can download the PDF of lists of different Banking Awareness topics.
In Banking Section, the questions are asked from following topics: History of Banking, banking terms, Marketing of Banking Products, Functions of Banks, Banks and their taglines, schemes, committees related to banking, headquarters of bank, some Banking news related, apps launched by banks, new schemes etc.
In a series of sharing useful study material for upcoming banking exams. Here, we are providing Banking Awareness notes for all banking Exams (IBPS, SBI & Other Banking Exams).
Cash Reserve Ratio : Banking Awareness Study Notes
Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter in the form of liquid cash.
The Cash Reserve Ratio in India is decided by RBI’s Monetary Policy Committee in the periodic Monetary and Credit Policy. The Reserve Bank of India takes stock of the CRR in every monetary policy review, which, at present, is conducted every six weeks. CRR is one of the major weapons in the RBI’s arsenal that allows it to maintain a desired level of inflation, control the money supply, and also liquidity in the economy. The lower the CRR, the higher liquidity with the banks, which in turn goes into investment and lending and vice-versa. Higher CRR can also negatively impact the economy as lesser availability of loanable funds, in turn, slows down investment. It thereby reduces the supply of money in the economy.
Objectives of Cash Reserve Ratio
There are two primary purposes of the Cash Reserve Ratio:
- Since a part of the bank’s deposits is with the Reserve Bank of India, it ensures the security of the amount. It makes it readily available when customers want their deposits back.
- Also, CRR helps in keeping inflation under control. At the time of high inflation in the economy, RBI increases the CRR, so that banks need to keep more money in reserves so that they have less money to lend further.
How does Cash Reserve Ratio help in times of high inflation?
At the time of high inflation, the government needs to ensure that excess money is not available in the economy. To that extent, RBI increases the Cash Reserve Ratio, and the amount of money that is available with the banks reduces. This curbs excess flow of money in the economy. When the government needs to pump funds into the system, it lowers the CRR rate, which in turn, helps the banks provide loans to a large number of businesses and industries for investment purposes. Lower CRR also boosts the growth rate of the economy.
How does CRR affect the economy?
Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary policy, which is used to regulate the money supply, level of inflation and liquidity in the country. The higher the CRR, the lower is the liquidity with the banks and vice-versa.
During high levels of inflation, attempts are made to reduce the flow of money in the economy. For this, RBI increases the CRR, lowering the loanable funds available with the banks. This, in turn, slows down investment and reduces the supply of money in the economy. As a result, the growth of the economy is negatively impacted. However, this also helps bring down inflation.
On the other hand, when the RBI needs to pump funds into the system, it lowers CRR. which increases the loanable funds with the banks. The banks thus extend a large number of loans to businesses and industry for different investment purposes. It also increases the overall supply of money in the economy. This ultimately boosts the growth rate of the economy.
How does Cash Reserve Ratio work?
WWhen the RBI decides to increase the Cash Reserve Ratio, the amount of money that is available with the banks reduces. This is the RBI’s way of controlling the excess flow of money in the economy. The cash balance that is to be maintained by scheduled banks with the RBI should not be less than 4% of the total NDTL, which is the Net Demand and Time Liabilities. This is done on a fortnightly basis.
NDTL refers to the total demand and time liabilities (deposits) that are held by the banks. It includes deposits of the general public and the balances held by the bank with other banks. Demand deposits consist of all liabilities which the bank needs to pay on demand like current deposits, demand drafts, balances in overdue fixed deposits and demand liabilities portion of savings bank deposits.
Time deposits consist of deposits that need to be repaid on maturity and where the depositor can’t withdraw money immediately. Instead, he is required to wait for a certain time period to gain access to the funds. This includes fixed deposits, time liabilities portion of savings bank deposits and staff security deposits. The liabilities of a bank include call money market borrowings, certificate of deposits and investment in deposits other banks.
In short, the higher the Cash Reserve Ratio, the lesser is the amount of money available to banks for lending and investing.
NDTL = Demand and time liabilities (deposits) with public and other banks – deposits with other banks (liabilities)
