Module: | Priority Sector, Consumer Protection & Digital Lending
Q87: Evaluate the relationship between Reserve Ratios and Bank Margins:
1. A hike in CRR typically puts pressure on a bank's Net Interest Margin (NIM).
2. Banks can use the interest earned on CRR balances to offset the cost of deposits.
2. Banks can use the interest earned on CRR balances to offset the cost of deposits.
✅ Correct Answer: A
The correct answer is A. Statement 1 is True: A hike in the Cash Reserve Ratio (CRR) mandates banks to hold a larger portion of their deposits with the RBI.
Since CRR balances earn zero interest, this increases the proportion of non-earning assets on the bank's balance sheet.
However, the bank must still pay interest to depositors on those funds, which effectively increases the overall cost of funds and squeezes the Net Interest Margin (NIM). Statement 2 is False: The fundamental premise is flawed because the RBI pays exactly 0% interest on CRR balances.
Therefore, there is no interest earned to offset the cost of deposits.
Since CRR balances earn zero interest, this increases the proportion of non-earning assets on the bank's balance sheet.
However, the bank must still pay interest to depositors on those funds, which effectively increases the overall cost of funds and squeezes the Net Interest Margin (NIM). Statement 2 is False: The fundamental premise is flawed because the RBI pays exactly 0% interest on CRR balances.
Therefore, there is no interest earned to offset the cost of deposits.