{"id":40794,"date":"2015-08-09T13:18:34","date_gmt":"2015-08-09T07:48:34","guid":{"rendered":"http:\/\/vskills.in\/certification\/blog\/?p=40794"},"modified":"2024-04-03T13:22:28","modified_gmt":"2024-04-03T07:52:28","slug":"credit-creation-by-banks","status":"publish","type":"post","link":"https:\/\/www.vskills.in\/certification\/blog\/credit-creation-by-banks\/","title":{"rendered":"Credit creation by banks"},"content":{"rendered":"

\"Credit<\/a><\/p>\n

Banks act as an intermediary between the person who has excess of funds and one who is in need of funds. The deposits which are accepted for the purpose of lending or investment from the public are payable on demand or withdrawal through cheque, draft etc . Banks activate the resources which are laying idle and puts them for productive uses.<\/p>\n

BANKS ARE ABLE TO ADD TO THE TOTAL MONEY SUPPLY (which is also an instrument of monetary policy) THROUGH THE PROCESS OF CREDIT CREATION.<\/p>\n

Credit may be defined as funds available by one party to another party on a certain interest rate.Money supply is the total stock of money in the economy and has two components:-<\/p>\n

(A) currency with the public<\/p>\n

(B) demand deposits<\/p>\n

The currency created by RBI is called the  high powered money.The commercial banks create the demand deposits which are also called bank money.<\/p>\n

Commercial banks receive deposits from the public.These deposits are used by banks to advance loans.<\/p>\n

Credit or money creation by banks is based on amount of initial deposits by the public and the legal reserve ratio.Legal reserve ratio <\/strong>or the LRR  is a proportion of the total amount of deposits which are legally compulsory for the banks to keep as cash.<\/p>\n

The process of money  creation starts with say a deposit of Rs.100.The banks cannot use  the whole amount deposited to advance loans but only a fraction of it as stipulated by LRR.Now this LRR is composed of two components :-<\/p>\n