Q1: Explain the effect of cash reserve ratio on credit creations by commercial banks
Q2: What are margin requirements? How does lowering or raising of margin requirements affe t the availability of credit?
Please answer these questions as soon as possible and answer correctly
Answers
Answer:
(1)Cash Reserve Ratio (CRR) – Banks know that all depositors will not withdraw all deposits at the same time. Therefore, they keep a fraction of the total deposits for meeting the cash demand of the depositors and lend the remaining excess deposits. ... These reserves are used for loans and credit creation.
(2) Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation. In case of inflation, the margin requirement is increased so that demand for loans are decreased and in case of deflation, margin requirements are decreased so that demand for loans are increased. For example- a person mortgages his house worth one crore rupees with the bank for a loan of 80 lakh rupees . The margin requirement in this case will be 20 lakh rupees.