Commercial banks create credit

1.	Commercial banks create credit
Answer» (i) Credit creation is one of the important functions of a commercial bank. It constitutes the major component of the money supply in the economy.(ii) They create credit in the form of demand deposits.(iii) The process of credit creation occurs when banks accept deposits and provide loans and advances. When the customer deposit money with the bank, they are called primary deposits. This money will not be withdrawn immediately by them.(iv) Hence banks keep a certain amount of deposits as reserves which are known as Legal Reserves Ratio (Cash Reserve Ratio and Statutory Liquid Ratio) and provide the balance amount as loans and advances.

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