Economy | 102
2 years ago

[Economy] Cash Reserve Ratio (CRR) Controversy between SBI & RBI: meaning, implication on Economy Explained

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  1. What is CRR?
  2. What is Scheduled Commercial Bank?
  3. Examples of Scheduled Commercial Banks
    1. Case #1: High CRR and SLR
    2. Case #2: Low CRR and SLR
  4. Repo Rate
  5. Reverse Repo Rate
  6. Bank Rate
  7. What is the need of all these CRR,SLR,Repo rates?
  8. What is the problem with CRR?
  9. How much CRR deposit does RBI have?
  10. What does SBI want?
  11. Deputy Governor of RBI
  12. Timeline of Events
  13. Mock Questions

What is CRR?

  • CRR means Cash Reserve Ratio.
  • Banks in India are required to hold a certain proportion of their total deposits with RBI in cash form.
  • Right now, CRR is about 4.75% that means if people deposit total Rs.100 in SBI, then SBI would have to deposit Rs.4.75 in RBI.
  • This is CRR or  Cash Reserve Ratio.
  • CRR rule doesnot apply to Regional Rural Banks, Non Banking Financial Companies (NBFC), Mutual funds or insurance companies.

What is Scheduled Commercial Bank?

  • Scheduled banks are those banks which have been included in the second schedule of the Reserve bank of India act of 1934.
  • The banks included in this schedule list should fulfill two conditions.
  1. The paid capital and collected funds of bank should not be less than Rs. 5 lakhs.
  2. Any activity of the bank will not adversely affect the interests of depositors [hahaha, does it mean Non-scheduled banks are allowed to adversely affect the interests of depositors !?]

Examples of Scheduled Commercial Banks

Public Sector Private Sector
Majority of stake is held by the government.

  1. State Bank of India (SBI)
  2. Punjab National bank (PNB)
Majority stakes are held by private players.

  1. ICICI,
  2. HDFC,
  3. AXIS Bank

Case #1: High CRR and SLR

Suppose total deposit deposited in (by you and me) State Bank of India =Rs.100

Total Deposit Rs.100
CRR: 15%SBI has to park this much amount of total deposit in RBI, without getting any interest. -15
SLR: 38%SBI has to park this much amount of total deposit, in Government securities / treasury bonds. SBI earns around 7.5% interest rate on this investment. -38
Money left with SBI 100-15-38=Rs.47

Case #2: Low CRR and SLR

Total Deposit Rs.100
CRR: 4.75%SBI has to park this much amount of total deposit in RBI, without getting any interest. -4.75
SLR: 23%SBI has to park this much amount of total deposit, in Government securities / treasury bonds. SBI earns around 7.5% interest rate on this investment. -23
Money left with SBI 100-4.75-23=Rs.72.25

In either case, as long as you’re running a bank, you’ll have some input costs such as

  1. Salary to Bank PO , Clerks, peons and security guards (With rusted guns)
  2. Office rent
  3. ATM machine’s electricity and maintenance.
  4. Newspaper advertizements.

To pay above salary and bills, SBI would need to maintain certain amount of profit margin, no matter what RBI does with CRR,SLR or Repo Rate.

In Case#1, when SBI has only Rs.47 in the hands, what can it do to keep the profit margin same?

Obviously SBI will have to increase the interest rates on car,home,bike,business loans given to customers.

In case#2, when SBI has Rs.72, what can it do? Here the situation is not that bad.

So, SBI chief would decrease the interest rates on car,home,bike,business loans to seduce more customers. We already discussed this- SBI has more money so it can cut down interest rates and suffer temporary reduction in profit, in order to seduce more customers (compared to ICICI) So once SBI has reduced the interest rates, other banks will need to reduce their interest rates, to stay in the competition.

Repo Rate

Let’s continue assuming the Case#2, that SBI has only Rs.72.25 left in its locker.

  • SBI chief comes to know that recently Samsung Company has launched Galaxy S3 mobile so plenty of youngsters may want to buy it because of the advertisements that appear on TV channels 24/7
  • Thus there will be demand for more personal loans (EMI) or credit card based shopping. But SBI got only Rs.72.25.
  • So SBI chief would borrow some more money from RBI @8% interest rate and then re-lend this money to customers as personal loan @16% (and thus making a killing profit of 16-8=8%)
  • or he can supply money to customers for Credit Card shopping, and in that case he can earn interest rate anything between 16-37% or even more (depending on hidden terms and conditions of credit  card.)
  • This 8% : the rate @which RBI lends short term loans to clients, is called Repo Rate.

Reverse Repo Rate

  • As the name suggests, Reverse repo rate is “reverse” of Repo rate.
  • So, if SBI chief feels there is not enough demand for loans and most of those 72.25 Rupees are sitting idle, he’ll deposit some of that cash, in RBI.
  • RBI will pay SBI chief 7% interest rate on such deposit.
  • Thus, Reverse repo rate is the interest rate which RBI pays its clients* for their short-term deposits.
  • Note: Reverse Repo Rate is automatically kept 1% less than Repo rate according to new RBI rules. [Since Nov.2010, Reverse Repo rate is constantly 1% less than Repo].

Side Question

Why would SBI chief put his money in RBI?
Because on your normal savings account in SBI, the chief pays you around 4% interest rate, while RBI is giving him 7% Reverse repo rate, so he’s making a profit of 3%.

Bank Rate

  • Bank rate is the interest rate which RBI charges from its clients* for their LONG-term loans.
  • Recall that Repo Rate  = RBI charge that much interest from its clients on SHORT term loans.

*Who’re the clients of RBI?

  1. Union Government
  2. State Government
  3. NABARD (through that money goes to Microfinance companies and Regional Rural Banks)
  4. Commercial Banks (SBI, ICICI etc)
  5. Non Banking Financial Companies (NBFC) like Muthoot Finance and Mannapuram Gold Loans.

(^list is not exhaustive.)

please note:

  1. Bank Rate, Repo Rate and Reverse Repo Rate applies to all Clients of RBI.
  2. The CRR,SLR applies to Commercial Banks. (including Urban Cooperative banks but excluding Regional Rural Banks)


What is the need of all these CRR,SLR,Repo rates?

  • RBI’s main job = control inflation by controlling money supply in the market.
  • Too much money in the market =easy to get loans= not good. Because It’ll create inflation. [Demand Pull]
  • Too less money in the market= again not good, because businessmen find it hard to get loans, thus input cost of production increases= not good for economy either and it’ll create inflation. [Cost push]
  • Therefore, RBI will increase/decrease these CRR, SLR and Repo Rates according to the situation in order to adjust the money supply in market and thus control inflation. [Monetary policy]
  • Nowadays RBI doesn’t touch Bank rate much and mostly relies on Repo rate to control the money supply.
  • CRR and SLR are also not  changed as frequently as Repo rate.
  • And Reverse repo rate is automatically kept 1% less than Repo rate, so that makes Repo rate the “most frequently used tool” in RBI’s monetary policy, in last two years.
  • Apart from that, CRR,SLR and Repo Rate also help those competitive magazine wallas to fill up pages with ridiculously unimportant data tables to make your life more miserable.

What is the problem with CRR?

  • CRR serves two purposes
    • Control money supply in the market
    • Acts like the ‘library deposit’, so if your bank goes broke / doesn’t play by the rules then RBI can use its CRR deposit to temporarily fix things.
  • Earlier, RBI had to pay interest rates on CRR deposits.
  • But in 2007, Government amended the RBI act so now RBI doesn’t have to pay any interest on the CRR deposits.
  • Obviously the SBI, ICICI etc wouldn’t like it because their money is sitting idle in the lockers of RBI without earning any interest.
  • They want CRR provision to be deleted.

How much CRR deposit does RBI have?

In July 2012 [all approximate numbers]

Total Deposits in all Scheduled Commerical banks (SBI,ICICI etc) 65 lakh crores
CRR: 4.75%Banks have to keep this much amount of total deposits in RBI. 65 lakh crores x 4.75%=around 3 Lakh crores sitting idle in RBI lockers.
Interest earned by SBI/ICICI etc on CRR deposits made in RBI 3 lakh crores x 0% = Rs.0
  • If SBI/ICICI etc. could lend these 3 lakh crores (CRR deposits) to customers @10%, they could easily earn Rs.30,000 crores in interest payment.
  • Thus, CRR makes a huge difference in the profit of banks.
  • UK, Canada, Sweden, Australia and New Zealand donot have CRR system in any form.
  • In USA, there is graded system i.e. small banks don’t need to maintain any CRR with their central bank.  While “big” banks would need to maintain CRR Deposit according to their size.
  • Side Question: How “big“? Answer: no need to do Ph.D on that question trail.
  • By the way, USA’s RBI (Central Bank) is known as Federal Reserve system and commonly known asFeds. So sometimes while randomly surfing through BBC/CNN you might come across lines like “Market boomed /crashed after Feds cut down the rates” they’re talking about USA’s RBI changing their repo, SLR etc. rates
  • Interestingly, USA’s RBI (Feds) pays interest on the CRR deposits, while India’s RBI doesn’t pay any interest on CRR deposits.

What does SBI want?

Recently SBI Chairman Pratip Chaudhari said that

  • CRR does not help anyone and it is unfair to apply it only on banks.
  • Even if CRR is required why should it be on banks alone? There are a number of institutions that raise funds from the public – insurance companies, mutual funds and NBFCs so CRR should be applicable to all.
  • Because of CRR, every year we lose Rs. 3,500 crore.
  • In India, Businessmen get loan @11 per cent while that for a Chinese equipment manufacturer gets loan in his country for only 4 per cent. So CRR= less money in market= higher interest rate= increases the input cost of Indian products.

Deputy Governor of RBI

On SBI chief Pratip Chaudhari’s demand for removal of CRR, the Deputy Governor of RBI K C Chakrabarty, replied that
if the SBI Chairman is not able to do business as per our regulatory environment, he has to find some other place.
On this [rude] comment of Chakrabarthy, SBI chief Pratip Chaudhari replied,
(doesn’t matter what anyone says) I wanted to start a debate on CRR in the public domain, so let that debate happen.

Timeline of Events

Early 90s CRR used to be as high as 15% and SLR used to be as high as 38.5%, thus making life of businessmen and aam juntaa difficult.
1992 RBI introduces system of Repo rate.
1996 RBI introduces the system of Reverse Repo Rate
1999 RBI starts paying interest rates to banks, on CRR deposits.
  • Sub Prime Crisis in USA
  • RBI stops paying interest rates to banks on CRR deposits.
  • Eurozone Crisis. For more on that topic, Click ME
  • High inflation, RBI starts increasing Repo rate to fix it.
  • Throughout the year, RBI keeps increasing Repo Rate to combat inflation.
  • Repo rates gets as high as 8.50%.
August 2012
  • SBI chief Pratip Chaudhari demands removal of CRR. [He has been doing it since a long time, even in 2011 seminars]
  • So, This CRR removal news topic would have faded away just like it did in 2011, had the RBI deputy governor not replied on SBI chief’s statement.
  • But RBI Deputy governor did, so the media blows the news out of proportion that “RBI snubs SBI chairman.”
  • And thus the Innocent aspirants of UPSC, bank and MBA exams, are forced to learn one more topic i.e. CRR controversy.

By the way, during this time,

  1. Bank Rate=9%
  2. Repo =8% (reverse repo would be obviously 8-1=7%)
  3. CRR=4.75%
  4. SLR=23%

Mock Questions

Q1. Which of the following statements are incorrect?

  1. The NBFCs are required to maintain CRR deposits with RBI.
  2. RBI pays interest rates on CRR deposits.
  3. An Increase in CRR would decrease the liquidity from the market.
  4. At present, Bank Rate > Repo Rate > Reverse Repo Rate.

Q2. Which of the following statements are correct?

  1. Repo rate is the interest rate paid by RBI to banks on short term deposits.
  2. A decrease in repo rate will increase the home loan interest rates.
  3. HDFC is a Non-scheduled Commercial bank.
  4. SLR is always 20% higher than CRR.

Q3. What were the steps taken by RBI in its monetary policy during 2011 to control inflation in India. Do you think RBI achieved its objective? Give reasons to justify your stand. (Mains)
Q4. If you were the RBI Governor, what steps would to take regarding the CRR issue?(interview)<


  1. Indian Economy by Ramesh Singh (Tata McGraw hill Publication)

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अब तक 102 कमेंट्स लिखी गयी

  1. Praveen Nayaka says:

    Thank you. It was like reading a story of BalaMangala .. Thanks a lot..

  2. SWATI says:

    THNXXXXXXXXX to solve my problem regading controversy of CRR.

  3. chokuva says:

    I am not a panegyrist but i would like to praise you – you are honestly a beautiful person master

  4. B+ says:

    Thank you boss !!!

  5. neha says:

    tooooo goood , really adorable effort

  6. Ajeet says:

    Thanx for a wonderful explaination sir……….

  7. anupama says:

    Sir…i am a new follower of ur website..but im highly impressed wid ur articles..they are really easy to understand & complete package…thankx a lot for helping students..

  8. Abhishek says:

    Nice article…very easy to understand every aspect of RBI stuff

  9. JP says:

    One more question
    U have said Bank rate is for all clients

    But my understanding was that, RBI lends money only to BANKS under this rate and When they dont meet their capital requirement they are penalized extra for it….
    And usual text call it SHORT TERM,u mentioned it as long term

  10. vijay says:

    jahapana tussi gr8 ho
    i really thank u for al ur inputs
    long live sir

  11. Shashank Garg says:

    Awesome!! No words! :)

  12. Privartan says:

    Thanks Sir for this great article

  13. akhilesh mishra says:

    thank you sir…

  14. B Govindan says:

    Only very recently I started reading your articles (at the age of 53!)- for the sake of my daughter!. It is amazing that you explain terms (let it be economics or reasoning or maths is a very simple and lucid manner. You are doing wonderful service to student community. May God Bless You.

  15. Ashish singh says:

    Hats off to you sir..


    You are the Guru, None can explain the vague banking concepts in a very simple way than this. A rustic person can learn with great ease. Thanks a million sir.

  17. Reshu Sharma says:

    I’ve never read that beyond-comprehension ECONOMICS in such a outstandingly amazing way……….thank you sir…..

  18. Aayat Khan says:

    Sir, Can you please define ‘Bank Rate’?I am not getting it even then you have define.

  19. vivek says:

    excellent concepts..Sir can u publish an article on fdi..

  20. Ritesh kumar says:

    Dear sir ,
    I am very much fan of mrunal blog and it is very helpful for me to enhancing my GK.Since i am preparing for IES Exam so
    please suggest me such kind of websites from where i can clear my doubts as it is done in this site .I would be
    thankful for it .

    Ritesh Kumar
    [email protected]

  21. Gourav Kumar Gupta says:

    Dear sir on what Factors does the RBI increase or decrease the CRR,SLR,RR,RRR policy rates
    Also can you provide me the formaulas of CRR etc so that its easy to crr is inversly proportional to purchasing power of public.

    Also whats that short interval of time for loan in Repo rate, Reverse repo Rate, CRR, SLR means 90 days or 1 day etc..

  22. aditya007 says:

    u r great mrunal sir……please sir kindly post the strategy for preparation of upsc 2014 exams!! for both prelims and mains !!

  23. Vikram says:

    Hi Mrunal,
    Could you list out non scheduled banks?

  24. Tej Bharath says:

    Q1. Both a and b are incorrect
    Q2. a is correct

  25. vamsi says:

    no one explain this way.
    you are amazing incredible person.
    we are lucky.thankyou sir.

  26. sandy73 says:

    Awesomeeeee Sir, your approach is like 3 IDIOTS teaching concept…. Thank you very much.

  27. rahul says:

    I do not have word to describe. How nicely you explained these concepts…God bless you mrunal..

    Thank you very much..

  28. Vishal Y Joshi says:

    please explain to me how much can banks borrow in terms of money from RBI through Reverse Repo rate and how much amount can bank tell RBI to keep with them under Reverse Repo.

    If LAF window is available then why would banks go for Marginal standing facility by RBI

    How much can bank borrow under MSF

  29. b23 says:

    thank you sir…its a quite understandable explanation..

  30. Bitupon says:

    Mrunal sir, i would like to suggest you to write a book to explain all economic/business terms in such simple language. Thanks a lot.

  31. kousar says:

    the explanation is amazing and very intresting to learn thanks allot.

  32. rajababu says:

    thank you very much for providing good material about economy.from hyderabad

  33. ajay says:

    As set out in the Reserve Bank’s Press Release 2012-2013/1267 dated January 29, 2013, it has been decided to reduce the Cash Reserve Ratio (CRR) of Scheduled State Co-operative Banks / Regional Rural Banks, by 25 basis points, from 4.25 per cent to 4.00 per cent, of their Net Demand and Time Liabilities (NDTL) with effect from the fortnight beginning February 9, 2013

    the above source from the site of rbi
    rrbs maintain crr or not….? plz reply sirrr

  34. sheikh amanullah says:

    what is rediscounting related to bank rate?
    if bank rate is for long term then why it is costlier than penal rate i.e repo rate

  35. ABHIMANYU says:

    great effort by you.commendable job

  36. jyoti says:

    You Are great mrunal sir….. THANK YOU VERY MUCH

  37. anju says:

    you explain the tough things so easily.. great work!!

  38. gagandeep says:

    sir cn u please a simplified explanation on prudential norms,liquidity coverage ration under basel 3

  39. Kanagaraj says:

    If i am there in RBI Governor position, i would pay interest for CRR & ensure that major part of the interest is passed on to their customers which will facilitates the corporate & people of the country for development…

  40. naveen b t says:

    Mrunal sir, hyperlink to SLR at the beginning of the article is missing. humble request to fix it. Thanks for your work

  41. aman says:

    very nice has humour which is desperately needed

  42. Piyush says:

    sir why don’t central banks pay interest on CRR balances…

  43. nidhi says:

    thank you, Sir

  44. [email protected] says:

    dear mrunal sir
    your slr article(more on slr) link is not working……please fix the saying page cant be found

  45. chara says:

    what about post office banks?do they come under crr??

  46. sreelakshmi says:

    your articles are good. but I think this article need a revision. No more rrbs are excluded from maintain crr

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