Commercial banks have to keep a minimum cash balance under the cash reserve ratio. A change in this ratio directly affects:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → the amount of funds available to be given as loans by commercial banks
Option (1) the amount of funds available to be given as loans by commercial banks — Correct. Banks must keep a part of their funds as the cash reserve ratio. When the RBI changes the ratio, the cash left over changes. So the change affects the funds available to be given as loans.
Option (2) the growth of deposits received by commercial banks from the public — Incorrect. Slow deposit growth is a condition for issuing certificates of deposit. The ratio does not decide it.
Option (3) the demand for credit that commercial banks face from business firms — Incorrect. The demand for credit comes from borrowers, not from the cash a bank must keep.
Option (4) the number of trade bills that commercial banks accept as commercial bills — Incorrect. A trade bill becomes a commercial bill when a commercial bank accepts it. The cash reserve ratio does not decide this.
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. …” |