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Money and Banking — Economics STD 12 Humanities & Commerce — Question

Rajasthan BoardEnglish MediumSTD 12 Humanities & CommerceEconomicsMoney and Banking3 Marks
Question
How do changes in cash reserve ratio affect availability of credit? Explain.

OR

Explain the effect of Cash Reserve Ratio (CRR) on credit creation by commercial banks.

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Answer

Cash reserve ratio refers to the minimum percentage of the total deposits of a bank which is required to be kept with the Central bank. All the commercial banks have to keep a certain percentage of their deposits in the form of minimum cash reserve ratio with the Central bank. For example, if the minimum reserve ratio is 10% and the total deposits of a commercial bank are ₹ 100 crores, it will have to keep ₹ 10 crores with the Central bank. If the minimum reserve ratio is 15%, the bank will have to keep ₹ 15 crores with the Central bank. Thus, when cash reserve ratio is increased, availability of credit is reduced and when the cash reserve ratio is reduced, Availability of credit is increased.

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