Define or Explain the following concepts. 6. Clearing House System

Define or Explain the following concepts.

6. Clearing House System

Answer: 

6. All the commercial banks are mandatorily required to keep a certain percentage of their deposits, other than cash reserve ratio (CRR), with the Central Bank. The Central Bank acts as a clearing house for the commercial banks. As a clearing house, it settles inter-bank claims and reduces the need for cash reserves by the commercial banks.

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