Question

How does improvement in banking habits of the people push up credit availability from the commercial banks?

Answer 1

When banking habits of people improve, they start holding less money as cash-in-hand. Instead, more and more money is deposited with the commercial banks. Accordingly, cash reserves of the commercial banks start rising. Higher cash reserves of the banks enable them to deposit more funds with the RBI as CRR deposits. If CRR remains constant, higher CRR-deposits with the RBI give the commercial banks legal authority to create more credit by way of loans /credit. Accordingly, availability of credit from the commercial banks is increased.