Through the process of ____ commercial banks are able to create credit, which is in far excess of the initial deposits.

Ans – (b)

Explanation:-

Through the process of money creation, commercial banks can create credit, which is in far excess of the initial or Primary Deposits.

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 Secondary Deposit.

However, banks can not use the whole of the deposit for lending.

It is legally compulsory for banks to keep a certain minimum fraction of their deposits as reserves.

The fraction is called the Legal Reserve Ratio (LRR) or Reserve Deposit Ratio

Example:-

Calculate the total credit creation if the initial deposit is ₹ 1,000 crores and LRR is 12.5%.

Solution: Given, LRR is 12.5% or 0.125

Total Credit Creation = Initial Deposits × 1/LRR

Total Credit Creation = 1,000 × 1/0.125

Total Credit Creation = 1,000 × 8 = ₹ 8,000 Crores.

Total Credit Creation is 8 times the initial deposits.