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Give Reason Or Explain the Following.Cash Reserve Ratio (Crr) Affects the Lending Capacity of Banks. - Economics

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Question

Give reason or explain the following.

Cash reserve ratio (CRR) affects the lending capacity of banks.

Solution

Cash reserve ratio (CRR) affects the lending capacity of banks.
Ans. By the Banking Act, commercial banks have to maintain a certain percent (3 percent to 15 percent) of cash with Central bank (RBI) as reserves against their demand and time deposits. This amount cannot be used by banks for lending activities.
If the CRR is increased the amount available for lending gets reduced and vice versa. Thus, the CRR affects the lending capacity of the banks.
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Definition - Central Bank
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2016-2017 (March)

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