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RAS question

What is the Cash Reserve Ratio (CRR)?

Correct answer: (B) Percentage of net demand and time liabilities banks must keep as cash with RBI.

The Cash Reserve Ratio is the share of a bank's net demand and time liabilities that it must maintain as cash balances with the Reserve Bank of India.

  1. (A)

    Percentage of deposits banks must invest in government securities

  2. (B)

    Percentage of net demand and time liabilities banks must keep as cash with RBI

  3. (C)

    Percentage of profits banks must keep as reserves

  4. (D)

    Percentage of loans that must be given to priority sector

Explanation

Cash Reserve Ratio (CRR) is a statutory reserve requirement: a bank must keep a prescribed percentage of its net demand and time liabilities as cash with the Reserve Bank of India. The RBI master circular places CRR alongside SLR as a reserve requirement monitored through statutory returns, and states that RBI prescribes CRR for scheduled commercial banks under Section 42(1) of the RBI Act. The key distinction is the form of the reserve. CRR is maintained as cash balance with RBI, so it is not an investment portfolio, a profit reserve, or a lending target. Banks also do not earn interest on CRR balances maintained with RBI.

Why the other options are wrong

  • (A) This describes SLR because it concerns investment in securities, whereas CRR is maintained as a cash balance with RBI.
  • (C) CRR is calculated on the bank's demand and time liability base, not on its profits, so profit reserves are a different concept.
  • (D) Priority Sector Lending norms govern where loans are directed, while CRR requires banks to keep cash with RBI.

Concept

This tests monetary policy instruments, especially the difference between CRR, SLR and directed-credit norms. It recurs in RAS because reserve requirements link banking regulation with liquidity control.

Source

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