What is credit creation and explain its process?
Answers
Answered by
3
The power of commercial banks to expand deposits through loans, advances and investments is known as “credit creation.”
Let us suppose, the bank in our economy-for sake of brevity we all it Bank X- receives a public deposit of Rs. 100. The minimum reserve requirement is being put at 10 per cent of the total deposits, i.e., the Bank X need keep with itself a cash reserve equal to Rs. 10 only to meet any demands arising out of its liabilities to its depositors. The bank has an excess reserve of Rs. 90. The sum can be extended in the from of loans and advances to the borrowers. loans and advances are extended more usually in one of the following forms:
(a) Bank may grant overdraft facilities to its depositors;
(b) Bank may discount bills of exchange; or
(c) Bank may open a new deposit in its books of account in favour of the borrower, crediting the amount of loan in the deposit account of the borrow, i.e., the bank raises its liabilities at the same time as it is adding to its assets.
Let us suppose, the bank in our economy-for sake of brevity we all it Bank X- receives a public deposit of Rs. 100. The minimum reserve requirement is being put at 10 per cent of the total deposits, i.e., the Bank X need keep with itself a cash reserve equal to Rs. 10 only to meet any demands arising out of its liabilities to its depositors. The bank has an excess reserve of Rs. 90. The sum can be extended in the from of loans and advances to the borrowers. loans and advances are extended more usually in one of the following forms:
(a) Bank may grant overdraft facilities to its depositors;
(b) Bank may discount bills of exchange; or
(c) Bank may open a new deposit in its books of account in favour of the borrower, crediting the amount of loan in the deposit account of the borrow, i.e., the bank raises its liabilities at the same time as it is adding to its assets.
Similar questions