Commercial Banks earn interest from lending money, So, they want to lend the maximum possible amount
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Commercial Banks earn interest from lending money, So, they want to lend the maximum possible amount. However, there is a limit to credit creation by banks and this is determined by ____, which is fixed by Central Bank.
Anurag Pathak Changed status to publish December 24, 2023
Commercial Banks earn interest from lending money, So, they want to lend the maximum possible amount. However, there is a limit to credit creation by banks and this is determined by Legal Reserve Ratio, which is fixed by Central Bank.
Explanation:-
Legal Reserve Ratio:-
According to Legal reserves requirements, commercial banks are obliged to maintain reserves.
It is a very quick and direct method for controlling the credit-creating power of commercial banks.
Commercial Banks are required to maintain reserves on two accounts:
1. CRR (Cash Reserve Ratio)
2. SLR (Statutory Liquidity Ratio)
An increase in the LRR decreases the cash reserves with the commercial banks decreasing its capacity of lending.
A decrease in the LRR increases the cash reserves of commercial banks, increasing it’s lending capacity.
Anurag Pathak Changed status to publish December 24, 2023
