Loans offered by commercial banks are equal to deposits received by them
True or False with Reasons
Loans offered by commercial banks are equal to deposits received by them.
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False,
Through the function of money creation, commercial banks are able to offer loans (or create credit), which are in far excess of deposits received
Explanation:-
Loans offered are for more excess than the initial deposits.
It depends on the initial deposits and LRR.
Total Credit Creation = Initial Deposits × 1/LRR
For Example:-
Initial Deposits = ₹ 1,000
LRR = 10% = 0.1
Total Credit Creation = 1,000 × 1/0.1
Total Credit Creation = ₹ 10,000
Thus, loans offered are 10 times more than the deposits.
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