Given below are two statements:
Assertion (A): Banks borrow from each other through call money.
Reason (R): Commercial banks have to maintain a minimum cash balance known as the cash reserve ratio.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
Assertion (A): Banks borrow from each other through call money. — True. Call money is short-term finance, repayable on demand, used for inter-bank transactions. Banks borrow it from each other.
Reason (R): Commercial banks have to maintain a minimum cash balance known as the cash reserve ratio. — True. Commercial banks must keep a minimum cash balance, known as the cash reserve ratio. The RBI changes this ratio from time to time.
Why R explains A?
A bank must always hold the cash required by the cash reserve ratio. When its cash falls short, it needs funds at once, often for a day or a few days. So it borrows from another bank through call money. Banks borrow from each other because they have to keep this minimum cash balance.
NCERT (Pre-rationalised Edition): “3. Call Money: Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. Commercial banks have to maintain a minimum cash balance known as cash reserve ratio. The Reserve Bank of India changes the cash reserve ratio from time to time which in turn affects the amount of funds available to be given as loans by commercial banks. Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. The interest rate paid on call money loans is known as the call rate. …” |