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Using a numerical example elaborate the credit creation process as handled by the commercial banks. |
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Answer» Creation of credit is one of the crucial functions performed by a commercial bank in modern times. The commercial bank is responsible for putting money (produced/created by central bank) in circulation through the process of credit creation or the lending process. Numercial Illustration, may be based on the following assumption: (i) There is only one bank in the economy. (ii) Initial deposits are say Rs.10000 crores and the legal reserve requirement proposed by the central bank is 10%. (iii) Credit Creation = Initial deposits x 1/LRR = 10000/0.1 = Rs.100000 crores Students may provide a schedule for deriving the same. |
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