Total deposits in Indian commercial banks amount to Rs. 5,00,000 crore. The public holds cash worth Rs. 50,000 crore. The RBI has fixed the cash reserve ratio (CRR) at 5% and the statutory liquidity ratio (SLR) at 4%. Banks also keep an excess reserve of 2% of deposits. Calculate the total credit that can be created by the banking system.

Step-by-step solution

1. Compute the amount banks must keep as required CRR: $0.05\times 5,00,000=25,000$ crore.
2. Compute the amount banks must keep as required SLR: $0.04\times 5,00,000=20,000$ crore.
3. Compute the excess reserves kept by banks: $0.02\times 5,00,000=10,000$ crore.
4. Add all non‑lending amounts: required CRR (25,000) + required SLR (20,000) + excess reserves (10,000) + cash held by public (50,000) = 1,05,000 crore.
5. Subtract the non‑lending amount from total deposits to obtain credit: $5,00,000-1,05,000=3,95,000$ crore.
6. Thus the banking system can create Rs. 3,95,000 crore of credit.

Concept tested: Credit creation process (reserves and cash holdings)

Published 28 September 2026 · How this solution was prepared and checked