What Are The Limitations Of Credit Creation?


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Sajid Majeed Profile
Sajid Majeed answered
Banks can only create credit under the policy of central bank. In case of inflation, the central bank increases Reserve ratio of the commercial banks. As a result, the banks lack deposits and issue less credit. On the other hand, in case of deflation the reserve ratio is decreased so that expansion of credit and vice versa.

Credit creation also depends upon borrowers, if no one wants to borrow money created creation will automatically be reduced and vice versa. If the market conditions are bright then bank can create at low cash reserve and if market is not in bloom the cash reserve must be high. The bank issue loans against good securities. If good securities are not available, credit can not be created.

The process of credit creation is effective and possible with the co-operation of commercial banks. If there is no co-operation among the banks, the process can not be completed.
If the people are illiterate, conservatives and not bank minded. They will not deposit money in the bank and process of creation will be adversely affected. Money supply in the country depends on the volume of credit created; credit creation plays a vital role in determining the volume of national income and volume of employment in the country.

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