Give reasons or explain. 3. The CRR affects the lending capacity of the banks.

Give reasons or explain.

3. The CRR affects the lending capacity of the banks.

Answer: 

CRR refers to the minimum portion of the total deposits that commercial banks have to maintain with the Central Bank in the form of reserves. CRR has a great impact on the lending capacity of the banks. An increase in CRR means lesser portion of the deposits would be left for distribution as loans and a decrease in CRR means a greater portion would be available for further loans.
Suppose the total assets of a bank are worth Rs. 200 Crores and the minimum CRR is 10%, the amount that the commercial bank has to maintain with the RBI is Rs. 20 Crores. If this ratio rises to 20%, the reserve with RBI increases to Rs. 40 Crores. Thus, less money will be left with the commercial bank for lending. This will eventually lead to a considerable decrease in the money supply. Therefore, CRR is used to affect the lending capacity of the commercial banks.

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