Banks create credit:
Banks create credit:
(a) Out of nothing
(b) On the basis of their securities
(c) On the basis of their total assets
(d) On the basis of deposits
Anurag Pathak Changed status to publish December 26, 2023
Ans – (d)
Explanation:-
Money or credit creation is one of the most important activities of commercial banks.
Through the process of money creation, commercial banks are able to create credit, which is in far excess of the initial or Primary Deposits.
This process can be better understood by making two assumptions:
(i) The entire commercial banking system is one unit and is termed as ‘Banks’.
(ii) All receipts and payments in the economy are routed through the Banks, i.e. all payments are made through cheques, and all receipts are deposited in the banks.
The deposits held by Banks are used for giving loans. Commercial banks grant loans to the borrower by opening a deposit account in the name of the borrower and crediting the loan amount in this account.
This is called a secondary deposit.
A certain amount of secondary deposit again is used to grant a loan to a new borrower.
and this credit creation goes on.
Anurag Pathak Changed status to publish December 26, 2023
