Financial Awareness - Risk, Stability & Emerging Finance
If the Reserve Bank of India increases the CRR, what immediate effect does it have on the bank's lending capacity?
If the Reserve Bank of India increases the CRR, what immediate effect does it have on the bank's lending capacity?
easy Q2 of 15
Step-by-Step Solution
Step 1: Understand CRR impact on lending
CRR is the portion of deposits banks must keep with RBI and cannot lend.Step 2: Effect of increasing CRR
Higher CRR means more funds locked as reserves, reducing money available for loans, thus decreasing lending capacity.Final Answer:
Lending capacity decreases as banks must hold more reserves → Option CQuick Check:
Increase in CRR = decrease in lending capacity ✅
Quick Trick: Higher CRR means less money to lend.
Common Mistakes:
- Assuming higher CRR increases lending capacity.
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