1. CREDIT CREATION BY COMMERCIAL BANKS

2. MEANING OF COMMERCIAL BANK:
A COMMERCIAL BANK IS THAT FINANCIAL INSTITUTION WHICH ACCEPTS DEPOSITS FROM THE PEOPLE AND GIVES LOANS FOR THE PURPOSE OF CONSUMPTION OR INVESTMENT
MEANING OF CREDIT:
A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date

3. Types of BANKS
There are various types of banks which operate in our country to meet the financial requirements of different categories of people.
Central Bank (RBI, in India)
Development Bank
Commercial Bank
Co-operative Bank
Specialized Banks(NABARD)
Foreign Banks(EXIM Bank)

4. Credit Creation of Commercial Bank
The commercial banks are the second most important sources of money supply. The money that commercial banks supply is called credit creation.
The process of ‘Credit Creation’ begins with banks lending money out of primary deposits. Primary deposits are those deposits which are deposited in banks.
After maintaining the required reserves, the bank can lend the remaining portion of primary deposits. Here bank’s lend the money and the process of credit creation starts.

5. Process of Credit Creation
Suppose there are a number of commercial Banks in the Banking system-Bank 1, Bank 2, Bank 3, & so on.
To begin with let us suppose that an individual “A” makes a deposit of Rs.100 in Bank 1. Bank “1” is required to maintain a cash reserve Requirement of 5% which is decided by RBI’s monetary Policy from the deposits made by ‘A’ Bank ‘1’ is required to maintain a cash reserve of Rs.5(5% of 100). The bank has now lendable funds of Rs.95(100-5). Lets the Bank “1” lends Rs.95 to a borrower; say B. The method of lending is the same that is bank 1 opens an account in the name of the borrower cheque for the loan amount. At the end of the process of deposits & lending, the balance sheet of bank read

6. Balance Sheet of Bank “1”
Liabilites
Assets
Amount
A’s deposits
100Amount
Cash Reserve 5
Loan to “B” 95
Total
100

7. Balance sheet of Bank “2”
Now suppose that money B borrowed from bank “1” is paid to individual “C” in settlement of his past debts. The individual “C” deposits the money in his bank say Bank “2”. Now bank 2 carries out its banking transaction. It keeps a cash reserve to the extend of 5% that is Rs.4.75(5% of 95) and lend Rs to a borrower D. at the end of the process the balance sheet of Bank 2 will be look like:-
Balance sheet of Bank “2”
Liabilities
Amount
Assets
B’s deposits 95
Cash Reserve
4.75
Loan to “C”
90.25
Total

8. The combined balance sheet of Banks
The amount advanced to D will return ultimately to the banking system, as described in case of B and the process of deposits and credit creation will continue untill the reserve with the bank is reduced to zero
The combined balance sheet of Banks
Bank Deposits
Liabilities Credit
Assets
Reserve
Total Assets
Bank 1
100.00
95.00
5.00
Bank 2
90.25
4.75
Bank3
85.73
4.52
Bank n
00.00
0.00
Total

9. Deposit Multiplier
The total deposit created by the commercial banks constitutes the money supply by the banks. Credit creation of commercial banks depends upon deposit multiplier.
Deposit multiplier= 1/CRR (5%)
= 1/0.05=20
In this example primary deposit is Rs.100/- deposit multilier is 20. hence total credit creation of commercial banks equal to 100×20=2,000.

10. Reserve Bank of India
The reserve bank of india established in April 1935 on the recommendation of the Hilton Young Commission.
It was nationalized in the year 1949.
Function of Reserve bank of India.
Bank of Issue
Banker to Government
Banker’s Bank & lender of last resort.
Controller of Credit

11. Reserve Bank of India- Credit Control
Types of credit control:
Quantitative methods.
Bank Rate
Open market operation
CRR(cash reserve ratio)
SLR(Statutory Liquidity Ratio)

12. II. Qualitative Methods
Fixation of Margin Requirement
Rationing of credit
Moral suasion
Direct action
Guidelines

13. THANK YOU
Ravi Sohpaul PGT.Economics KV. NO.1 Srinagar