Posted in Finance, Accounting and Economics Terms, Total Reads: 225
Definition: Free Reserves
Based on a few rates, such as the CRR and SLR, liquidity in the economy can be controlled. The CRR is by definition the percentage of fraction of the total money that needs to be reserved by a bank with the RBI. So this forms the required reserves.
Any reserves that are over and above this, summing up to the total reserve a bank holds, forms the free reserves. Essentially, this is the amount that is loanable to clients.
The amount of free reserves form a key factor in commercial banks since they need to have that money so as to be able to forward in the form of loans. This money comes in the form of deposits that are made with a bank – usually savings / fixed deposits by households and current accounts by organizations.
In any economy, the level of free reserves is an indicator of credit availability from the banks in the form of loans.