Credit creation by commercial banks

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Credit creation by commercial banks

Posted by Anesh Khemani 7 years ago

CBSE > Class 12 > Economics

3 answers

Zeel Patel 7 years ago

Suppose initial deposits of bank is 1000 and LRR is 20%.it means banks are require to keep only 200 rs as cash reserve and free to land 800 rs. Now when it provide loan to other person in there bank account than according to other bank there cash reserve will be only 160 and will lend other money on loan Now when 2nd bank will provide loan to 3rd bank 3rd bank will reserve 128rs and give 512 on loan the process will be continue till it becomes zero. To find money multiplier there is one formula that is (100/LRR)×initial deposits. For this sum it would be (100/LRR)×initial deposit (100/20)1000 5×1000=5000

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Divya Dalmia 7 years ago

Sorry yogita ingle i think there is one mistake two primary function of bank are acceptance of deposits and advancement of loans

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Yogita Ingle 7 years ago

Commercial banks increases the flow of money in an economy by credit creation. This process of credit creation is an outcome of its two primary functions, i.e. acceptance of loans and advancement of deposits. The banks issue loans from their cash reserves with the confidence on their historical experience that all depositors will not withdraw their funds at the same time. In this way, commercial banks create credit many more times than their cash reserves and contributes to increase money supply in the economy. It depends on initial level of deposits and money multiplier.

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