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What is Credit Creation about?
Credit creation is the process by which commercial banks increase the money supply by lending out a portion of deposits while keeping a fraction as reserves. Using an example with an initial deposit of ₹1,000 and a cash reserve ratio of 20%, banks can create total deposits of ₹5,000 through successive rounds of lending and depositing. The money multiplier, calculated as 1 divided by the cash reserve ratio, indicates that for every ₹1,000 deposited, banks can ultimately create ₹5,000 in total deposits.
- Author
- Jai Rudra Sethi
- Language
- EN