Commercial Applications
If the central bank decides to promote economic growth by lowering the bank rate, which of the following is a likely consequence for commercial banks?
- They will increase interest rates on loans to maintain profitability.
- They will decrease their lending activity to reduce risks.
- They will expand their lending activities due to lower borrowing costs.
- They will raise the Cash Reserve Ratio to align with central bank policies.
Answer
They will expand their lending activities due to lower borrowing costs.
Reason — Bank rate is the rate at which the central bank rediscounts first class securities of commercial banks. When the central bank lowers the bank rate, central bank credit becomes cheaper for commercial banks. Commercial banks then reduce their market rate of interest, which encourages borrowers to borrow more, leading to expansion of credit and lending activities.
Related Questions
Which of the following is/are correct statement(s)?
Statement 1: The Central Bank can influence the country's economy by adjusting the Cash Reserve Ratio (CRR).
Statement 2: Commercial banks can issue currency notes as long as they meet the reserve requirements set by the Central Bank.
- Only Statement 1 is true
- Only Statement 2 is true
- Both statements are true
- Both statements are false
A bank draft is always dishonoured if there are insufficient funds in the drawer's account at the time of encashment.
- True
- False
Central bank is owned by the while commercial bank is owned by .
- Shareholders, shareholders
- Government, shareholders
- Shareholders, government
- None of these
Assertion (A): Commercial banks primarily engage in profit-oriented activities.
Reason (R): Commercial banks have the authority to set monetary policies, establish reserve requirements, and conduct financial stability assessments to ensure the sound functioning of the banking system.
- A is true but R is false
- A is false but R is true
- Both A and R are true and R explains A
- Both A and R are true but R does not explain A