Which of the following statement/statements qualifies/qualify as valid in connection with the banking mechanism in India?

I. Increasing the Cash Reserve Ratio (CRR) will result in increasing credit creation.

II. Cash Reserve Ratio (CRR) applies only to the new deposit base while the Incremental Cash Reserve Ratio (ICRR) specifically targets the new borrower lending base.

III. Tenor Premium' is an important component in the calculation of the Marginal Cost of Funds based Lending
Rate (MCLR).

IV. Marginal Standing Facility (MSF) is used as a long-term policy rate and is generally lower than the Bank Rate.

Select the correct answer using the codes given below:

Key Points

• Increasing the Cash Reserve Ratio (CRR) will result in decreasing credit creation, not increasing it. Hence, statement I is incorrect.
• Cash Reserve Ratio (CRR) applies to the total deposit base of banks, while Incremental Cash Reserve Ratio (ICRR) applies to the incremental deposits. Statement II is incorrect.
• 'Tenor Premium' is an important component in the calculation of the Marginal Cost of Funds based Lending Rate (MCLR). Hence, statement III is correct.
• Marginal Standing Facility (MSF) is used as a short-term policy rate, usually higher than the Bank Rate. Hence, statement IV is incorrect.

Additional Information

• Cash Reserve Ratio (CRR):
  • The CRR is the percentage of a bank's total deposits that must be maintained as reserves with the central bank (RBI) in the form of liquid cash.
  • It is a tool used by the RBI to control liquidity in the banking system.
  • An increase in CRR means banks have less money to lend, thereby reducing liquidity and credit creation.
• Incremental Cash Reserve Ratio (ICRR):
  • ICRR is similar to CRR but applies only to the incremental deposits received by banks.
  • It is used by the central bank to target specific liquidity conditions in the banking system.
• Marginal Cost of Funds based Lending Rate (MCLR):
  • MCLR is the minimum interest rate that a bank can lend at.
  • It is determined based on the marginal cost of funds, tenor premium, operating costs, and the negative carry on account of CRR.
  • Tenor premium refers to the additional interest rate charged by banks for lending long-term loans compared to short-term loans.
• Marginal Standing Facility (MSF):
  • MSF is a window for banks to borrow from the RBI in an emergency situation when inter-bank liquidity dries up completely.
  • Banks can borrow funds overnight at the MSF rate, which is higher than the repo rate.
  • It is a short-term measure and is generally used to provide quick liquidity to banks.