Question

Using a numerical example elaborate the credit creation process as handled by the commercial banks.

Answer 1

Creation of credit is one of the crucial functions performed by a commercial bank in modern times. 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.

Numercial Illustration, may be based on the following assumption:

(i) There is only one bank in the economy.

(ii) Initial deposits are say Rs.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.100000 crores

Students may provide a schedule for deriving the same.