What is meaning of cash reserve ratio and its advantages and diadvantages?

Answer 1

.. IT IS COMPULSORY THAT EVERY SCHEDULED COMMERCIAL BANKS IN India EXCEPT RURAL REGIONAL BANKS (RRB) HAVE TO MAINTAIN A CERTAIN PERCENTAGE OF FUNDS WITH RESERVE BANK OF INDIA WITH REFERENCE TO THEIR DEMAND AND TIME LIABLITIES (DTL) ACCORDING TO RBI ACT 1934 SEC 42(1) CRR IS MAINTAINED TO ENSURE SOLVENCY AND LIQUIDITY OF THE BANKS (SCB)SCHEDULED COMMERCIAL BANKS.

WHAT IS DEMAND AND TIME LIABLITY ?

DEMAND LIABLITY ARE THOSE LIABLITY WHICH ARE PAYABLE ON DEMAND :EXAMPLE-

@SAVINGS BANK ACCOUNT

@CURRENT DEPOSIT

@UNCLAIMED DEPOSIT

@MARGINS HELD AGAINST LC AND BG (LETTER OF CREDIT AND BANK GRANTEES)

WHAT ARE TIME LIABILITIES?

THOSE LIABILITIES WHICH ARE NOT PAYABLE ON DEMAND BUT ARE LIABLE AT A PARTICULAR POINT OF TIME .EXAMPLE :-

@ FIXED DEPOSITS

@CASH CERTIFICATE

@ COMMUTATIVE AND RECURRING DEPOSIT

@STAFF SECURITY DEPOSIT

ADVANTAGES OF MAINTAINING CRR:

1) TO ENSURE LIQUIDITY AND SOLVENCY POSITION OF SCHEDULED COMMERCIAL BANKS

2) TO MONITOR AND REGULATE THE FLOW OF CREDIT GIVEN BY COMMERCIAL BANKS

3) TO ENSURE A STABLE FLOW OF CREDIT IN THE ECONOMY

4) WHEN RBI INCREASES CRR THE SCB RESTRICT THE FLOW OF CREDIT TO THE PUBLIC WHICH SUCKS THE MONEY FROM THE GENERAL PUBLIC

5) WHEN RBI DECREASES CRR THE SCB GRANT MORE CREDIT LOANS AND OTHER FACILITIES TO THE GENERAL PUBLIC WHICH INCREASE THE FLOW OF MONEY IN THE HANDS OF MANY

DIS ADVANTAGES OF CRR :

1) AFFECTS INDUSTRIAL GROWTH ,WHEN COMMERCIL BANKS HAVE TO MAINTAIN HIGH RATE OF CRR WITH RBI THE RESTRICT THE CREDIT TO GENERAL PUBLIC WHO ARE NONE OTHER THAT BUSINESS DEVELOPERS ,ENTREPRENEURS AND OTHER INDUSTRIALISTS WHO SEEK PRE AND POST SHIPMENT FINANCE

2) REDUCES THE STANDARD OF LIVING OF PEOPLE WHEN CRR IS INCREASED

3)BANKS LOOSE THEIR VALUABLE CUSTOMERS WHEN THEY ARE IN A SITUATION NOT TO PROVIDE CREDIT TO GENERAL PUBLIC CONTACT FOR MORE anandshankarrajabbm@gmail.com