In banking regulation, what is the cash reserve ratio CRR?

Introduction / Context:
Cash reserve ratio, often abbreviated as CRR, is an important monetary policy tool used by central banks. It influences how much money commercial banks can lend and therefore affects liquidity in the economy. Many competitive examinations and banking interviews ask for its definition, so a clear understanding of what is included in the ratio and where the reserves are kept is essential.

Given Data / Assumptions:

• CRR is set by the central bank, such as the Reserve Bank in India.
• It is calculated as a percentage of certain bank liabilities, usually demand and time deposits.
• The required reserves must be maintained as cash balances with the central bank.
• The question focuses on definition, not on current numerical value.

Concept / Approach:
Cash reserve ratio represents the portion of customer deposits that banks must hold as cash with the central bank and cannot use for lending or investment. By increasing CRR, the central bank reduces the amount of lendable resources in the banking system; by decreasing it, the bank injects liquidity. CRR is different from ratios related to capital, profits, taxes or statutory liquidity requirements. Therefore, the correct option must describe CRR as a percentage of demand and time liabilities maintained as cash with the central bank.

Step-by-Step Solution:
Step 1: Recall that CRR is a reserve requirement, not a profitability or tax measure. Step 2: Identify that the base for CRR is a bank demand and time deposits or net demand and time liabilities. Step 3: Recall that these reserves must be kept with the central bank, usually as a cash balance. Step 4: Review the options and select the one that matches this description. Step 5: Eliminate options mentioning share capital, profits, government securities or foreign exchange reserves.

Verification / Alternative check:
To verify, think about how central banks announce policy measures. When they state that CRR is, for example, four percent, they mean that for every 100 units of demand and time deposits, a bank must keep four units as cash balance with the central bank. These funds cannot be used for lending to customers or investing in securities. Any change in CRR directly affects the amount of funds available for lending, which confirms that the correct definition involves a percentage of deposits held as cash reserves with the central bank.

Why Other Options Are Wrong:
Option B is wrong because it describes a ratio related to loans and share capital, which is more like a leverage or capital adequacy measure, not CRR. Option C is incorrect because tax on profits is decided through tax law, not through a cash reserve ratio. Option D relates foreign exchange reserves and exports, which may be used in macroeconomic analysis but is not called CRR. Option E partially resembles another concept, the statutory liquidity ratio, which involves maintaining a portion of deposits in specified securities, but CRR specifically concerns cash balances with the central bank.

Common Pitfalls:
A frequent mistake is confusing CRR with other regulatory ratios such as statutory liquidity ratio or capital adequacy ratio. Students may also misunderstand whether reserves are held with the central bank or with the commercial bank itself. Another pitfall is trying to memorise current CRR values without fully understanding the definition, leading to confusion when values change. Focusing on the core idea that CRR is a cash reserve requirement on deposits maintained with the central bank helps anchor the concept firmly.

Final Answer:
The percentage of a bank total demand and time deposits that must be kept as cash reserves with the central bank.