The Cash Reserve Ratio (CRR), which entails the set percentage of cash required to be kept in reserves as against the bank’s total deposits, has over the past increased in Nigeria, lowering commercial bank earnings and thereby harming the country’s economy. Therefore, if commercial banks in the country want to improve their earnings, the CRR should be cut. This paper seeks to analyze the impacts of CRR on the commercial bank while citing its effects on economic goals.
High credit reserve ratios have significant impacts on the bank’s operations and the economy at large. For instance, in Nigeria, Shareholders under the banner of the Independence Shareholders Association of Nigeria (ISAN) voiced concern about the high CRR and the probable erosion of the bank’s profitability (Oji, 2021). According to the study, shareholders with over N12 trillion in restricted deposits with the Central Bank of Nigeria (CBN) urged the central bank to lower the CRR or provide interest on idle funds (Oji, 2021). Anthony Omojola, the President of ISAN, also stated in an interview that the bank’s initial reports for 2021 revealed weak revenue costs as the CRR was raised. This added significant disruptions to the banks’ currency flows, which had already been hampered by the effects of Covid-19 and oil price shocks.
Research Questions for The Quantitative Study
How Does CRR Work with Commercial Banks?
CRR requires the commercial banks to hold a certain proportion of their deposits in the central bank’s current account. This implies that banks cannot utilize the reserve money for anything other than what is prescribed. Commercial banks desire a low CRR when it comes to reserves since they must maintain this fund ratio with the Reserve Bank of India (RBI) without receiving any interest on the money. The money is held without charge. When the RBI decides to raise the CRR, the quantity of money accessible to banks decreases. As a result, Scheduled banks must therefore maintain a cash balance with the RBI of at least 4% of total Net Demand and Time Liabilities (NDTL) (Oji, 2021). Which limits their capacity to trade in the financial market.
How Does CRR Affect Interest Rates?
If the CRR is raised, the money stock with the commercial banks reduces, and the cost of credit plummets. As a result, banks will have a limited lending capacity in terms of funds. Therefore, to offset this limitation, they will increase the cost of credit to discourage borrowers from taking loans. At the same time, they will increase deposit charges on their depositors, thus increasing interest rates. On the other hand, when the CRR is reduced, banks will have more money to invest in other industries. This indicates that they will have surplus funds, resulting in lower lending interest rates.
How Does CRR Affect the Economy?
When the RBI raises the CRR, it reduces the amount of money available in the economy, slowing investment. As a result, economic growth suffers. This, on the other hand, contributes to the reduction of inflation. However, when the RBI lowers the CRR, it expands the amount of loanable funds available to banks (Oji, 2021). In turn, the banks grant a vast number of loans to enterprises and industries for various investment goals. Moreover, it helps expand the economy’s total money supply, which boosts the economy’s growth rate.
How Does CRR Affect Depositors?
As a depositor, individuals might be wondering how the CRR will affect them. They may believe that the CRR does not affect them because it solely affects banks and other financial firms. However, when a bank complies with the CRR criteria, a part of its deposits will be completely safe. They will not have to be concerned even if banks make poor decisions. As a result, if a depositor has invested in bank stocks, an increasing CRR rate signals that their profit margins will be reduced.
Reference
Oji, H. (2021). Shareholders decry effect of Cash Reserve Ratio on banks. The Guardian Nigeria News. Web.