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InterviewSolution
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Discuss about minimum cash reserve ratio and liquidity ratio as instruments of credit control. |
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Answer» Minimum Cash Reserve Ratio: The commercial banks have to keep some percent of their total reserves with the Central Bank in the form of reserve fund. The changes in cash reserve ratio affect the lending capacity of the commercial banks. If credit is to be controlled, then this ratio is increased and if credit is to be expanded, then this ratio is decreased. Liquidity Ratio: The commercial banks have to keep- a certain fixed proportion of their total reserves with themselves in the form of cash. This is known as liquidity ratio. This amount cannot be lent by commercial banks. If the credit.is to be expanded then the Central Bank lowers this ratio. On the other hand, the liquidity ratio is increased if it becomes necessary to control the credit. |
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