Commercial Applications
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?
- Reducing the Statutory Liquidity Ratio (SLR).
- Increasing the Cash Reserve Ratio (CRR).
- Lowering the Bank Rate.
- Conducting open market operations to purchase government securities.
Banking
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Answer
Increasing the Cash Reserve Ratio (CRR).
Reason — An increase in CRR forces commercial banks to keep a larger portion of their cash reserves with the central bank, thereby reducing the amount of money available to lend. This directly constrains the bank's ability to extend more credit to small businesses. Reducing SLR, lowering bank rate and purchasing government securities (open market operations) would all expand credit, not constrain it.
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