Module: | Capital Adequacy, Basel Norms & Monetary Policy
Q5: Which of the following best defines the 'Cash Reserve Ratio' (CRR)?
1. The share of Net Demand and Time Liabilities (NDTL) that banks must maintain in liquid assets like gold and government securities.
2. The share of Net Demand and Time Liabilities (NDTL) that banks must maintain as cash balances with the Reserve Bank of India.
3. The percentage of total deposits that banks must lend to priority sectors.
4. The portion of deposits that banks must keep in their own vaults as emergency cash.
Which of the statements given above is/are correct?
2. The share of Net Demand and Time Liabilities (NDTL) that banks must maintain as cash balances with the Reserve Bank of India.
3. The percentage of total deposits that banks must lend to priority sectors.
4. The portion of deposits that banks must keep in their own vaults as emergency cash.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. The Cash Reserve Ratio (CRR) is a monetary policy tool used by the Reserve Bank of India (RBI) to regulate liquidity in the banking system.
It is defined as the mandatory portion or percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained as a liquid cash balance with the RBI.
This requirement is legally mandated under Section 42(1) of the Reserve Bank of India Act, 1934.
The RBI currently pays zero interest on these CRR balances.
Option A is incorrect because maintaining liquid assets like gold and government securities describes the Statutory Liquidity Ratio (SLR), not CRR.
Option C is incorrect as the percentage of deposits mandated for priority sectors refers to Priority Sector Lending (PSL) targets, which are entirely separate from cash reserves.
Option D is incorrect because cash kept in the bank's own vaults ("Cash in Hand") does not qualify as CRR; CRR must exclusively be parked with the RBI.
It is defined as the mandatory portion or percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained as a liquid cash balance with the RBI.
This requirement is legally mandated under Section 42(1) of the Reserve Bank of India Act, 1934.
The RBI currently pays zero interest on these CRR balances.
Option A is incorrect because maintaining liquid assets like gold and government securities describes the Statutory Liquidity Ratio (SLR), not CRR.
Option C is incorrect as the percentage of deposits mandated for priority sectors refers to Priority Sector Lending (PSL) targets, which are entirely separate from cash reserves.
Option D is incorrect because cash kept in the bank's own vaults ("Cash in Hand") does not qualify as CRR; CRR must exclusively be parked with the RBI.