Login

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

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- â€‹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

 
 

  • 0
View Full Answer
the above statement is false because lower cash reserve would mean higher lending capacity bcause the amount of reserve the will have to keep with rbi decreases . The above statement can either be used as a  measure to correct excess or deficient demand . During the time of excess demand crr increases and vice versa
 
  • 0
What are you looking for?