Give reason or explain.
The CRR affects the lending capacity of the banks.
CRR refers to the minimum portion of the total deposits that the commercial banks have to maintain with the Central Bank in the form of reserves. CRR has a great impact on the lending capacity of the banks. An increase in CRR means lesser portion of the deposits would be left for distribution as loans and a decrease in CRR means a greater portion would be available for further loans. Suppose the total assets of a bank are worth Rs. 200 Crores and the minimum CRR is 10%, the amount that the commercial bank has to maintain with the RBI is Rs. 20 Crores. If this ratio rises to 20%, the reserve with RBI increases to Rs. 40 Crores. Thus, less money will be left with the commercial bank for lending. This will eventually lead to considerable decrease in the money supply. Therefore, CRR is used to affect the lending capacity of the commercial banks.