The process of credit creation by commercial banks comes to an end when:

Ans – (d)

The process of credit creation comes to an end when the cash reserves of the commercial bank become equal to the initial deposits.

Explanation:-

Let us now understand the process of Money Creation through an example:

• Suppose, initial or primary deposits in banks are ₹ 1,000 and LRR is 20%. It means, banks are required to keep only ₹ 200 as cash reserve and are free to lend ₹ 800. Suppose they lend ₹ 800. Banks do not lend this money by giving the amount in cash. Rather, they open the accounts in the names of borrowers, who are free to withdraw the amount whenever they like.

• Suppose borrowers withdraw the entire amount of ₹ 800 for making payments. As all the transactions are routed through the banks, the money spent by the borrowers comes back into the banks in the form of deposit accounts of those who have received this payment. It will increase the demand deposits of banks by ₹ 800.

• With new deposits of ₹ 800, banks keep 20% as cash reserves and lend the balance ₹ 640. Borrowers use these loans for making payments, which again come back into the accounts of those who have received the payments. This time, bank deposits rose by ₹ 640.

• The deposits keep on increasing in each round by 80% of the last round deposits. At the same time, cash reserves also go on increasing, each time by 80% of the last cash reserve. Deposit creation comes to an end when total cash reserves become equal to the initial deposit.