BANKING GENERAL KNOWLEDGE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Amount of cash received by the bank
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Banking habits of the people
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Leakages in credit creation
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None of these
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Detailed explanation-1: -All commercial banks create credit by advancing loans and purchasing securities. They lend money to the individuals as well as to the businesses out of deposits accepted from the public. Commercial banks are not allowed to use the entire amount of public deposits for lending purposes.
Detailed explanation-2: -Some of the limitations are: 1. Cash Reserve Ratio 2. Availability of Adequate and Proper Securities 3. Keeping of Reserve with the Central Bank 4.
Detailed explanation-3: -A commercial bank is a dealer of credit. It creates money based on cash deposits. Further, it issues new money through its loan operations and creates credit or expands the monetary base of a country. Therefore, this process of credit creation leads depositors to believe that they have money with the bank.
Detailed explanation-4: -Credit creation separates a bank from other financial institutions. In simple terms, credit creation is the expansion of deposits. And, banks can expand their demand deposits as a multiple of their cash reserves because demand deposits serve as the principal medium of exchange.