Question

Give reasons or explain the following statement:
Cash reserve ratio (CRR) affects the lending capacity of banks.

Answer 1

Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must have keep as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation. CRR usually affects the leding capacity of a bank to the general public as it is legal obligation for all the banks to main a reserve with the central bank.