Credit creation by commercial banks is determined by: (Choose the correct alternative)
Credit creation by commercial banks is determined by: (Choose the correct alternative)
(a) Cash Reserve Ratio (CRR)
(b)Â Statutory Liquidity Ratio (SLR)
(c) Initial Deposits
(d) All of the above
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Ans – (d)
Explanation:-
Credit creation is determined by initial deposits and LRR (Legal Reserve Ratio)
The legal Reserve Ratio consists of two components:
1. Cash Reserve Ratio (CRR)
2. Statutory Liquidity Ratio (SLR)
For example
Initial Deposits = ₹ 5,000
LRR = 10%
Total Credit Creation = Initial Deposits × 1/LRR
Total Credit Creation = 5,000 × 1/10%
Total Credit Creation = 5,000 × 10
Total Credit Creation = ₹ 50,000
Additional Information:-
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