Do you
consider a commercial bank ‘creator of money’ in the
economy’?
Do you consider a commercial bank ‘creator of money’ in the economy’?
Commercial
banks play the important role of ‘money creator’ in the
economy. They have the capacity to generate credit through demand
deposits. These demand deposits make credit more than the initial
deposits.
The
process of money creation can be explained by taking an example of a
bank XYZ. A depositor deposits Rs.10,000 in his savings account,
which will become the demand deposit of the bank. Based on the
assumption that not all customers will turn up at the same day to
withdraw their deposits, bank maintains a minimum cash reserve of 10
% of the demand deposits, i.e. Rs.1000. It lends the remaining amount
of Rs.9000 in the form of credit to other customers. This further
creates deposits for the bank XYZ. With the cash reserve of Rs.1000,
the credit creation is worth Rs.10,000. So, the credit multiplier is
given by:
Credit
multiplier = 1/CRR = 1/10% = 10
The money
supply in the economy will increase by the amount (times) of credit
multiplier.
Commercial banks play the important role of ‘money creator’ in the economy. They have the capacity to generate credit through demand deposits. These demand deposits make credit more than the initial deposits.
The process of money creation can be explained by taking an example of a bank XYZ. A depositor deposits Rs.10,000 in his savings account, which will become the demand deposit of the bank. Based on the assumption that not all customers will turn up at the same day to withdraw their deposits, bank maintains a minimum cash reserve of 10 % of the demand deposits, i.e. Rs.1000. It lends the remaining amount of Rs.9000 in the form of credit to other customers. This further creates deposits for the bank XYZ. With the cash reserve of Rs.1000, the credit creation is worth Rs.10,000. So, the credit multiplier is given by:
Credit multiplier = 1/CRR = 1/10% = 10
The money supply in the economy will increase by the amount (times) of credit multiplier.
