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What Is Credit Creation?

11 Answers

Muhammad Abdullah786 Profile
One of the important functions of commercial bank is the creation of credit. Credit creation is the multiple expansions of banks demand deposits. It is an open secret now that banks advance a major portion of their deposits to the borrowers and keep smaller parts of deposits to the customers on demand. Even then the customers of the banks have full confidence that the depositor's lying in the banks are quite safe and can be withdrawn on demand. The banks exploit this trust of their clients and expand loans by much more time than the amount of demand deposits possessed by them. This tendency on the part of the commercial banks to expand their demand deposits as a multiple of their excess cash reserve is called creation of credit.
The single bank cannot create credit. It is the banking system as a whole which can expand loans by many times of its excess cash reserves. Further, when a loan is advanced to an individuals or a business concern, it is not given in cash. The bank opens a deposit account in the name of the borrower and allows him to draw upon the bank as and when required. The loan advanced becomes the gain of deposit by some other bank. Loans thus make deposits and deposits make loans.
Anonymous Profile
Anonymous answered
Credit Creation is Most Important Function of Commercial Bank, Like Other Financial Institute Bank aim to Earn Profit by Make Advance to Other. Therefore, Some Time Bank Is Called a Factory of Credit Creation. Everyone Know that People Cannot Withdrawal Money in simultaneous, Some With drawl While Other deposit at Same Time. So Bank Encourage Credit Creation By Given Advance to other, Keep Small Cash in Reserve se for day to day Tran sanction.
Example:
Person A Deposit in Bank Rs 10000, and Cash Reserve Ration is 10%.
Than Bank Only Keep 10% in His Account, Give 90 of Rs 10000 Amount to other By Loan Or Anything... To Person B, While Person B Deposit This Amount in His Bank, 9000, Again His Bank Keep Only 10% Reserve, And Give Remain to Person C, While This Process Will Be Cont.. Until The Credit Creation is Equal to 10000.
Person Amount cash Reserve (10%) Credit Creation
A 10000 1000 9000
B 9000 900 8100
C 8100 810

So On....
vijanti dhanji Profile
vijanti dhanji answered
Cash money is available in the form of currency notes issued by the central bank. Credit money is the amount agreed upon to pay later. It is issued by commercial banks and takes the form of cheques. Cash deposit and cash reserve requirements play an important role in the expansion and contraction of credit money. Credit expansion takes places by means of using cheques. Now suppose, person deposits rupees. 1000/= with a bank, ten percent of which will go to the central bank as cash reserve requirements. Hence the commercial bank is left with rupees.900 to be used for advancing loans. The party A that borrows this rupees.900 will either buy goods from or make payment to the other party B.

The party B will receive the cheque for rupees. 900 and deposit it in the account with the same commercial bank. Now the bank receives the deposit of rupess.900. Ten percent of this amount will as usual go to the central bank and the rest of the amount will be utilized in advancing loans. Bank of England is the best example. Bank organized under cooperative societies are called cooperative banks. They work on mutual cooperation of the members.
Anonymous Profile
Anonymous answered
Credit cretaion refers to a unit power of the banks of lons and advances hence deposits with a little cash in hand the banks can create additional purchasing power to a considerable degree. It is because of multile credit creating power that the commercial banks to expand secondry deposits either through the process of making loans thru investnments.
Mahir Abdelsadig Profile
What Is The Definition Of Credit Creation?
Anonymous Profile
Anonymous answered
An increase in the deposit amount means an increase in the money supply in the country. Banks are able to increase deposits by granting loans and advances. This power of the banks to expand deposits through the expansion of their loans and advances is known as credit creation.
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Shabir Ahmad Profile
Shabir Ahmad , Rehan Shabir, answered

The
banks whose operations mainly influence the money supply are called
commercial bunks, because in the early days, most bank borrowers were
engaged in commerce rather than manufacturing. These banks perform a
variety of service functions. My bank receives my paycheck every month,
allows me to draw checks on the account, and sends me a statement at the
end of the month. But this is an unexciting and not very profitable
operation. The lifeblood of commercial banking is lending — sizing up
would-be borrowers and advancing them money at a price.

What happens when a bank makes a loan? A company applies for a loan of
$1 million, and the bank agrees. The company gives the bank a piece of
paper promising to repay the loan after, say, six months. The bank gives
the company an addition of $1 million to its checking account. Money
supply increases. When the time for payment comes round, unless the loan
is renewed, repayment is made by deducting $1 million from the
company's checking account. The central principle is simple: Making a
loan creates money, while repaying a loan extinguishes money.

This looks very easy and profitable — the bank just creates money by a
stroke of the pen. So why not create as much money as possible? The
difficulty with this idea is that when people and companies have
checking accounts, they are likely to use them. In addition to writing
checks, they may want to draw out part of their deposit in cash. So a
bank must have some cash in the vault, and a place where it can go for
more cash if necessary. In short, a bank must have reserves.

What, concretely, are reserves? They consist partly of currency (bills
and coins) held in the bank to meet day-to-day requirements. Most
reserves, however, take the form of deposits (checking accounts) with
the Federal Reserve System. All national banks must be members of the
system, and the Fed requires them to carry reserves equal to a specified
percentage of their deposits. In addition, under the Monetary Control
Act of 1980, all banks and savings institutions, whether members or
non-members, must carry a certain percentage of their deposits as
reserves and must report on this regularly to the Fed. This "certain
percentage", the minimum legal reserves-to-demand-deposits ratio, is
usually called the reserve requirement.

If the volume of their demand deposits is already so large that the
banks have just enough reserves to satisfy the reserve requirement, they
can create no demand deposits, for to do so would cause the
reserves-to-demand-deposits ratio to fall below the minimum legal level.
On the other hand, if the banks have more than enough reserves to meet
the reserve requirement, they can expand their loans and investments by
creating additional demand deposits.

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