Which of the following are NOT the limitations in the creation of credit of commercial banks? (1) The…
The credit-creation capacity of commercial banks is constrained by (1) the volume of primary cash reserves held by banks, (2) the availability of eligible collateral…
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Which of the following are NOT the limitations in the creation of credit of commercial banks?
(1) The amount of cash that commercial banks possess
(2) Supply of collateral security
(3) Monetary policy of the central bank
(4) Allied deposits scheme
(5) Deposits linked with special benefits
Answer and explanation
Correct answer D
The credit-creation capacity of commercial banks is constrained by (1) the volume of primary cash reserves held by banks, (2) the availability of eligible collateral security and creditworthy borrowers, and (3) the reserve requirements and monetary policy of the central bank. Promotional retail deposit products such as (4) Allied deposits schemes and (5) Deposits linked with special benefits actually attract deposits and are NOT limitations on credit creation. Thus, '4 and 5 only' is correct.
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UGC NET Commerce