Explain the credit creation process of commercial bank with numerical example.
Answers
Answer:
Commercial banks create credit by advancing loans and purchasing securities. They lend money to individuals and businesses out of deposits accepted from the public. ... After keeping the required amount of reserves, commercial banks can lend the remaining portion of public deposits.
Explanation:
The commercial bank is responsible for putting money produced/created by central bank in circulation through the process of credit creation or the lending process. ... 10000 crores and the legal reserve requirement proposed by the central bank is 10%. iii Credit Creation = Initial deposits x 1/LRR= 10000/0.1= Rs.
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Answer:
1) Bank receives cash deposits from the people. These are called primary deposit.
2) Banks lend money many times more than their cash reserves
3) Money is lent by the commercial banks not in the form of cash , but in the form of credit entry in the accounts of borrowers.
4) The borrowers can issue cheque against credit in their accounts .
5) Primary deposits + Secondary Deposit = Demand deposits held by the people in the commercial banks.
6) Total demand deposits with the banks are many times more than the cash reserve of the commercial banks
Explanation: