When CRR is reduced banks have more cash to lend to customers But the amount of credit lent to consu...........

Economic Affairs Others

When CRR is reduced, banks have more cash to lend to customers. But, the amount of credit lent to consumers is often more than the cash released by lowering of CRR. This is because of

Multiplication of banking operations owing to multiple subsidiaries

High Capital adequacy ratio (CAR) maintained by banks irrespective of CRR changes

Credit creation by banks

CRR reduction not being applicable to priority sector lending

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Explanation:

When CRR is reduced, banks have more cash to lend to customers. This increases the liquidity in the market.

Primary liquidity is the amount that is injected in the market without any credit creation by banks. When banks lend the same money (obtained after relaxing CRR) repeatedly, extra credit is created. This extra credit is called secondary liquidity.

Option A and B are irrelevant to the analysis and option D is wrong in principle.