question_answer

Explain the components of Legal Reverse Ratio.

Or

Explain 'bankers' banks function of Central bank.

 

Answer:

A certain minimum fraction of deposits which is legally compulsory for the commercial banks to keep in the form of liquid assets, is known as legal reserve ratio. There are two components of this ratio, those are as follows:

(i) Cash Reserve Ratio (CRR): It is a part of deposits which is kept with central bank as reserve in cash by the commercial banks.

(ii) Statutory Liquidity Ratio (SLR): It is a ratio of deposits which banks have to keep with themselves in the form gold or securities.

Or

Central bank is the apex bank of all the commercial banks and financial institutions in the country. It holds the same relationship with the commercial banks as commercial banks holds with its customer. The central bank accepts deposits from the commercial banks and holds it as reserves for them. The commercial banks are compulsorily required to hold a part of their deposits as reserves with the central bank in accordance with the cash reserve ratio (CRR). In addition to the CRR requirements, the commercial banks hold reserves with the central bank for clearing their settlements with other banks and fulfill their requirements to inter-bank transfers.