Question

What Are the Limitations of Credit Creation by Commercial Banks?

Answer 1

Limitations of credit creation by commercial banks are as follows:

1. The amount of cash banks possess is directly proportional to the amount of credit they can create.
2. Availability of adequate securities helps in credit creation
3. The large volume of currency in circulation is a decisive factor in the creation of credit by banks.
4. Withdrawal of deposits by customers will reduce the cash reserve which will impact the credit creation ability of banks.
5. The behavior of other banks in extending loans will impact credit creation.

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Also see:

• Difference Between Central Bank and Commercial Bank
• MCQs on Commercial Banks
• Functions of Commercial Banks