Question

'Lower cash reserves imply lower credit creation capacity of banks' Explain?

Answer 1

Dear Student,

Cash reserve means is a specified minimum fraction of the total deposit of customers, which commercial bank have to hold as reserves either in cash or as deposits with the RBI.

How credit creation is done by bank- ​Mainly by (a) By giving a loan, and (b) By purchase of securities.

So if the cash reserve is low than Bank will have higher amount portion of deposit with it and they can provide higher amount of loan and purchase securities thus it will increase credit creation capacity.
Statement given in the question false.

Regards