Module: | MODULE C: TREASURY MANAGEMENT
Q484: Consider the following statements regarding the statutory maintenance and penal enforcement of the Cash Reserve Ratio:
1. The Cash Reserve Ratio is the mandatory minimum percentage of a bank's Net Demand and Time Liabilities that must be maintained as cash balances with the RBI, on which the RBI pays zero interest.
2. Under current banking regulations, there is no statutory minimum or maximum ceiling for the Cash Reserve Ratio, granting the RBI absolute discretion to set the rate based on macroeconomic liquidity.
3. If a bank fails to maintain the required Cash Reserve Ratio on any given day, a penal interest of Bank Rate plus 3% is levied for the first day, escalating to Bank Rate plus 5% for subsequent consecutive days.
4. Inter-bank term deposits with a maturity of 15 days and above, and up to 1 year, are completely exempted from the calculation of Net Demand and Time Liabilities for Cash Reserve Ratio maintenance purposes.
2. Under current banking regulations, there is no statutory minimum or maximum ceiling for the Cash Reserve Ratio, granting the RBI absolute discretion to set the rate based on macroeconomic liquidity.
3. If a bank fails to maintain the required Cash Reserve Ratio on any given day, a penal interest of Bank Rate plus 3% is levied for the first day, escalating to Bank Rate plus 5% for subsequent consecutive days.
4. Inter-bank term deposits with a maturity of 15 days and above, and up to 1 year, are completely exempted from the calculation of Net Demand and Time Liabilities for Cash Reserve Ratio maintenance purposes.
✅ Correct Answer: B
The Cash Reserve Ratio (CRR) is a primary quantitative monetary policy tool governed by Section 42(1) of the RBI Act, 1934.
It mandates that all scheduled commercial banks must park a specified fraction of their total Net Demand and Time Liabilities (NDTL) as liquid cash in their current accounts maintained with the Reserve Bank of India.
Crucially, this reserve is sterile; the RBI currently pays exactly zero interest on CRR balances, making it an implicit tax on the banking system.
Following an amendment to the RBI Act in 2006, the statutory floor (previously 3%) and the ceiling (previously 20%) were entirely removed, empowering the RBI to dynamically push the CRR to any level required to absorb or inject systemic liquidity.
CRR maintenance is rigidly enforced on a fortnightly reporting Friday basis.
If a bank incurs a daily shortfall, the RBI imposes an immediate penal interest rate calculated at the Bank Rate plus 3% for the first day of default.
If the default continues into the next day, the penalty aggressively escalates to the Bank Rate plus 5%. To prevent double-counting of systemic reserves, specific liabilities are exempted from NDTL calculations, notably inter-bank term deposits ranging from 15 days up to 1 year.
A: This option incorrectly excludes statement 3. The tiered penal interest structure (Bank Rate + 3% escalating to Bank Rate + 5%) is a strict, mathematical regulatory enforcement mechanism for CRR defaults.
B: This is the correct option.
All four statements precisely outline the zero-interest nature of CRR, the legislative removal of rate caps, the specific default penalties, and the inter-bank NDTL exemptions.
C: This option is logically incomplete, capturing the rate flexibility and penalties, but omitting the foundational definition of CRR (statement 1) and the NDTL calculation exemptions (statement 4).
D: This option incorrectly excludes statement 2. The removal of the statutory minimum and maximum ceilings for CRR is a major legislative evolution in Indian banking regulation.
It mandates that all scheduled commercial banks must park a specified fraction of their total Net Demand and Time Liabilities (NDTL) as liquid cash in their current accounts maintained with the Reserve Bank of India.
Crucially, this reserve is sterile; the RBI currently pays exactly zero interest on CRR balances, making it an implicit tax on the banking system.
Following an amendment to the RBI Act in 2006, the statutory floor (previously 3%) and the ceiling (previously 20%) were entirely removed, empowering the RBI to dynamically push the CRR to any level required to absorb or inject systemic liquidity.
CRR maintenance is rigidly enforced on a fortnightly reporting Friday basis.
If a bank incurs a daily shortfall, the RBI imposes an immediate penal interest rate calculated at the Bank Rate plus 3% for the first day of default.
If the default continues into the next day, the penalty aggressively escalates to the Bank Rate plus 5%. To prevent double-counting of systemic reserves, specific liabilities are exempted from NDTL calculations, notably inter-bank term deposits ranging from 15 days up to 1 year.
A: This option incorrectly excludes statement 3. The tiered penal interest structure (Bank Rate + 3% escalating to Bank Rate + 5%) is a strict, mathematical regulatory enforcement mechanism for CRR defaults.
B: This is the correct option.
All four statements precisely outline the zero-interest nature of CRR, the legislative removal of rate caps, the specific default penalties, and the inter-bank NDTL exemptions.
C: This option is logically incomplete, capturing the rate flexibility and penalties, but omitting the foundational definition of CRR (statement 1) and the NDTL calculation exemptions (statement 4).
D: This option incorrectly excludes statement 2. The removal of the statutory minimum and maximum ceilings for CRR is a major legislative evolution in Indian banking regulation.