According to Central Bank’s instructions, every bank has to keep a specific percentage of deposits in cash funds which is called cash fund ratio. Cash fund ratio effects the credit creation capabilities of banks. If cash reserve ratio is high, the credit created by bank is low, and if cash reserve ratio is low, then credit created by bank is high.
For example : If cash reserve ratio is 20%, then from a deposit of Rs.100, the bank can give loan of up to Rs. 80 only.
