Question

Give Reasons or Explain the following:
The cash reserve ratio affects the lending capacity of the 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 in the form of cash. Cash reserve ratio affects the lending capacity of the banks. If the cash reserve ratio is high, then the bank will have to maintain more amount of cash with the central bank which will reduce their lending capacity and if the cash reserve ratio is low, then the bank will have to maintain less amount of cash with the central bank which will increase their lending capacity.