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Question
A commercial bank is considering increasing its lending to small businesses. Which of the following actions by the Central Bank would most likely constrain the bank’s ability to do so?
Options
Reducing the Statutory Liquidity Ratio (SLR).
Increasing the Cash Reserve Ratio (CRR).
Lowering the Bank Rate.
Conducting open market operations to purchase government securities.
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Solution
Increasing the Cash Reserve Ratio (CRR).
Explanation:
The Cash Reserve Ratio (CRR) specifies the required proportion of total deposits that commercial banks must keep as cash reserves with the Central Bank. When the Central Bank raises this percentage, it forces liquid capital out of the banking system, reducing commercial banks' excess reserves and directly limiting their credit creation capacity to make new loans to small businesses.
