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प्रश्न
Explain the credit creation role of commercial banks with the help of a numerical example.
Discuss the role of commercial banks in credit creation.
Explain the money creation process by the commercial banks with the help of an example.
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उत्तर १
Credit creation is now often seen as the primary activity of commercial banks. Commercial banks issue credit based on their deposits. Thus, credit creation refers to the ability of banks to increase their secondary deposits through loans, advances, and investments in excess of their main deposits. Commercial banks' money generation (or credit creation) process is influenced by the amount of initial fresh deposits and CRR, the minimum cash reserve ratio of deposits legally mandated to be maintained as cash by banks.
Example:
If the CRR is 20%, the fresh deposit is ₹ 10,000. The bank keeps 20%, or ₹ 2000, as cash. Assume the bank lends the remaining ₹ 8000 as loans. As a result, those who get payouts keep the funds in the bank. Banks get additional deposits of ₹ 8000. The bank maintains 20% (₹ 1600) as cash and lends the remainder ₹ 6400 (80% of the deposits). The money is returned to the banks, resulting in a new deposit of ₹ 6400. Money continues to multiply, resulting in a total of ₹ 50,000, as indicated in the table below.
Money creation by commercial banks:
| Rounds | Deposits (₹) | Loans (₹) | Cash reserve (₹) |
| Initial | 10,000 | 8000 | 2000 |
| I | 8,000 | 6400 | 1600 |
| II | 6,400 | 5120 | 1280 |
| − | − | − | |
| − | − | − | |
| Total | 50,000 | 40,000 | 10,000 |
Thus, credit is created or generated in commercial banks.
उत्तर २
Commercial banks create demand deposits and, hence, add to the supply of money.
Example: Suppose the amount of the initial deposit is ₹ 1000, and LRR is 10%. The banks will keep 10%, i.e., ₹ 100, as reserve and lend the remaining ₹ 900 to borrowers. The borrowers will spend this money. It is assumed that ₹ 900 comes back to the bank. The bank again keeps 10% of ₹ 900, i.e., ₹ 90 reserve and lends ₹ 810. This will further raise the amount of deposits with the banks. In this way, deposits continue to increase. The number of times the total deposits will become is determined by the money multiplier.
Money Multiplier = `1/"LRR"`
= `1/0.10`
= 10
The total deposits will be:
Initial deposits × Money Multiplier
= 1000 × 10
= 10,000
