BANKING AFFAIRS

Detailed explanation-1: -If a bank cannot lend, then it cannot create credit. In other words, the credit creation depends on the amount of loan that a bank grants. The size of the cash deposit is an important factor too. If a bank has a smaller cash base, then it has a lesser scope for creating credit.

Detailed explanation-2: -The credit creation process of commercial banks is determined by the amount of initial deposits and the cash reserve ratio.

Detailed explanation-3: -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-4: -Limitations of Credit Creation This limit is determined by the central bank, as the central bank may contract or expand this limit by selling or purchasing the securities. It refers to the amount of money in the form of reserve that needs to be kept with the central banks by the commercial banks.