makes a credit entry of lakh in that account. This leads to creation of demand deposits in that account. The point to be noted here is that there is no payment in cash. Thus, without printing additional money, the supply of money is increased.
(ii) Credit Creation Credit Creation means the multiplication of loans and advances. - - Banking Commercial banks receive deposits from the public and use these deposits to give loans. However, loans offered are many times more than the deposits received by banks. This function of banks is known as ‘Credit Creation’.
(iii) Collection of Statistics: Banks collect and publish statistics relating to trade, commerce and industry. Hence, they advice customers and the public authorities on financial matters. . .
. Mechanism / Technique of Credit Creation by Commercial Banks Bank credit refers to bank loans and advances. Money is said to be created when the banks, through their lending activities, make a net addition to the total supply of money in the economy. Likewise, money is said to be destroyed when the loans are repaid by the borrowers to the banks and consequently the credit already created by the banks is wiped out in the process.
Banks have the power to expand or contract demand deposits and they exercise this power through granting more or less loans and advances and acquiring other assets. This power of commercial bank to create deposits through expanding their loans and advances is known as credit creation. Primary / Passive Deposit and Derived / Active Deposit The modern banks create deposits in two ways. They are primary deposits and derived deposits .
When a customer gives cash to the bank and the bank creates a book debt in his name called a deposit, it is known as a “primary deposit’. But when such a deposit is created, without there being any prior payment of equivalent cash to the bank, it is called a ‘derived deposit’. Credit Creation literally means the multiplication of loans and advances. Every loan creates its own deposits.
Central Bank insists the banks to maintain