Question

Credit creation by comercial bank.

Answer 1

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Credit creation commercial banke are the unique financial institution as they creature #deposit money ! Power of the commercial banks to create money arises from 2 imp. fact:-


•] On the basis of primary deposits , commercial banks are able to create derivative deposits.

•] Commercial banks are able to create multiple deposits bcoz they know that all the deposits holders do not withdraw money from the banks at the same time .


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Answer 2

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Commercial banks create credit by advancing loans and purchasing securities. ... Let us learn the process of credit creation by commercial banks with the help of an example. Suppose you deposit Rs. 10,000 in a bank A, which is the primary deposit of the bank. The cash reserve requirement of the central bank is 10%.

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