Question

Which of the following factors can directly affect the Credit Creation ability of the banks?

1. Cash Reserve Ratio
2. REPO Rate
3. Statutory Liquidity Ratio
4. Inflation

• A. 1, 3
• B. 2, 3
• C. 1, 4
• D. 3 only

Answer 1

Answer:

A. 1, 3

• The key factors influencing credit creation in banks include the amount of deposit base, the reserve ratio set by the central bank, the demand for loans from borrowers, and the bank's willingness to lend.

DIRECT INSTRUMENTS:

CRR (Cash Reserve Ratio)

•  It is the certain percentage of net demand and time liability (NDTL) of banks that must be maintained with RBI.

• The refinance fund from NABARD, SIDBI, RBI are exempted from CRR provision.

• There is a penal charge for not maintaining CRR at the rate of 3%.

SLR (Statutory Liquidity Ratio):

• It is a requirement that, commercial banks have to keep a specified portion of their NDTL (Net Demand & Time Liability) in liquid assets.

• SLR is maintained in the form of cash, gold or bond (govt. security).

• Penal charge for not maintaining CRR, SLR is 3%.

INDIRECT METHODS:

1. Repo Rate

2. Reverse Repo

3. LAF (Liquidity Adjustment Facility

4. Open Market Operations

5. MSS (Market Stabilization Scheme

6. Marginal Standing Facility (MSF)

7. SDF (Standing Deposit Facility)