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प्रश्न
''The process of credit creation by commercial banks comes to an end when the total of required reserves become equal to the initial deposits."
With the help of a numerical example, prove that the given statement is true.
उत्तर
The following statement is correct. "The credit creation process by commercial banks concludes when the total of required reserves equals the initial deposits."
Credit creation is a process in which a primary deposit (people's savings) becomes a secondary deposit (people's borrowings), which becomes a new deposit, and so on until the initial deposit equals legal reserves.
| Round | Primary Deposit | Secondary Deposit | LRR = 20% |
| 1 | 1000 | 800 | 200 |
| 2 | 800 | 640 | 160 |
| 3 | 640 | 512 | 128 |
| 4 | 512 | ........ | ........ |
| . | . | . | . |
| . | . | . | . |
| . | . | . | . |
| . | . | . | . |
| Total | 5000 | 4000 | 1000 |
`1/"LRR"` × Initial Deposits
= `1/(20%) × 1000`
= 5000
Credit has been created 5 times of initial deposits. When Initial deposits of 1000 become equal to legal reserves of 1000, the process of credit creation comes to an end.
संबंधित प्रश्न
Credit creation by commercial banks is determined by (Choose the correct alternative)
Explain the credit creation role of commercial banks with the help of a numerical example.
Explain the concept of ‘inflationary gap’. Also explain the role of ‘legal reserves’ in reducing it.
Answer the following question.
Explain, using a numerical example, how a reduction in reserve deposit ratio, affects the credit creation power of the banking system.
Define Credit Multiplier.
______ is the main source of money supply in an economy.
Credit creation by the commercial bank is determined by ______.
Access to adequate and timely credit at affordable rates is critical for the rural poor to alleviate high cost debt and invest in livelihood opportunities. Despite the Government of India's best efforts, financial inclusion of the rural poor has been beset with multiple challenges. Lack of adequate banking infrastructure and human resources in rural areas, unplanned expansion leading to unviable bank branches and low levels of financial literacy amongst the rural populace have been some of the key challenges.
The most vulnerable communities, who often had no formal credit history or ability to provide collateral, have often been the worst affected. Inability to access loans from banks meant that the poorest had to resort to moneylenders for loans at unreasonably high rates of interest that invariably led them into a toxic debt trap.
In this context, the SHG-Bank Linkage programme, formalised by the National Bank for Agriculture and Rural Development (NABARD) in 1995, synthesizes 'formal financial systems' (in terms of a formal institution providing credit) with the 'informal sector' (comprising of rural poor with no formal credit history), has emerged as a preferred vehicle for providing financial services to the hitherto unbanked poor.
Community Based Repayment Mechanisms (CBRMs) have been institutionalised at branches involved in financing SHGs to monitor and ensure timely repayment of loans by SHGs. The number of SHGs with outstanding bank loans stands at nearly 5 million today, implying that the program has brought formal banking services to over 50 million women.
There are two statements given below, marked as Assertion (A) and Reason (R). Read the statements and choose the correct option.
Assertion (A): Micro-credit can help empower women and make them financially independent.
Reason (R): Micro-credit involves small loans provided at reasonable interest rates that can help people start their own ventures.
Access to adequate and timely credit at affordable rates is critical for the rural poor to alleviate high cost debt and invest in livelihood opportunities. Despite the Government of India's best efforts, financial inclusion of the rural poor has been beset with multiple challenges. Lack of adequate banking infrastructure and human resources in rural areas, unplanned expansion leading to unviable bank branches and low levels of financial literacy amongst the rural populace have been some of the key challenges.
The most vulnerable communities, who often had no formal credit history or ability to provide collateral, have often been the worst affected. Inability to access loans from banks meant that the poorest had to resort to moneylenders for loans at unreasonably high rates of interest that invariably led them into a toxic debt trap.
In this context, the SHG-Bank Linkage programme, formalised by the National Bank for Agriculture and Rural Development (NABARD) in 1995, synthesizes 'formal financial systems' (in terms of a formal institution providing credit) with the 'informal sector' (comprising of rural poor with no formal credit history), has emerged as a preferred vehicle for providing financial services to the hitherto unbanked poor.
Community Based Repayment Mechanisms (CBRMs) have been institutionalised at branches involved in financing SHGs to monitor and ensure timely repayment of loans by SHGs. The number of SHGs with outstanding bank loans stands at nearly 5 million today, implying that the program has brought formal banking services to over 50 million women.
This programme would be successful if it can support a large number of people. What would the number of beneficiaries depend on?
Read the given extract carefully and answer the following questions.
| Mr. X wanted to buy an expensive motorcycle for his son but he did not have sufficient money to buy it. He approached a public sector commercial bank for the loan. The bank asked Mr. X to deposit 20% cash of the loan amount and rest 80% of the loan amount was given by the bank. |
- Briefly explain a Commercial Bank.
- What is the regulation of consumer credit in selective credit control?
- Name the bank which controls all the commercial banks and financial institutions in the country.
Explain the role of legal reserve ratio and Bank rate in correcting inflationary gap in an economy.
Identify which of the following Statement is true?
The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is called ______.
Credit money is increased when CRR:
Match the following and select the correct option.
| Column A | Column B | ||
| (i) | A deposit created by a customer | A. | Term deposit |
| (ii) | A deposit created by bank when loan is granted | B. | Demand deposits |
| (iii) | Deposits payable by bank on demand | C. | Initial deposit |
| (iv) | Deposits the amount of which can be withdrawn only after a fixed period of time | D. | Secondary deposit |
Match the following:
| Column I | Column II | ||
| A. | Formula of Money Multiplier | (i) | Inverse |
| B. | Money multiplier = 4 | (ii) | Money multiplier = 10 |
| C. | Relationship between LRR and money multiplier | (iii) | LRR = 0.25 |
| D. | LRR = 0.1 | (iv) | `1/"LRR"` |
What is meant by credit creation?
What is money multiplier?
