Question

How does a bank create credit?

Answer 1

Answer:

There are two ways in which a bank creates credit:

(i) By advancing loans on the cash credit basis or by an overdraft arrangement.

(ii) By purchasing securities and paying for them with its own cheques.

Answer 2

Answer :

There are two ways in which a bank create credit:

(i) By advancing loans on the cash credit basis or by an overdraft arrangement;

(ii) By purchasing securities and paying for them with its own cheques.

Explanation :

In both these cases, deposits are created (or credit is created for the borrower), and the credit of the bank is embodied in a definite transaction. In all, a very small cash reserve is kept by the bank to meet the obligations arising out of these transactions, and the credit aggregates to a very big amount.

Conclusion :

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