Creation of Credit Credit creation
Banking is a comprehensive wide term
in which different types of financial activity take places. In other words – a
system or place where we put our money or valuable things for safety purpose
and take back or withdrawal according to our need or requirement. Bank system
deal in money, it takes money from depositor on a low rate and gives it to
industries on other/higher rates according to their needs. if bank have more amount or deposit than after he is able to create more credits.
When a bank deals with the industry
or give loan to the some-one, it does create credit (साख बनाना).It is an important
part of banking system. It means a bank give loan to some, it takes an interest
from them and also it is the main resources of a bank income. A loan system or
credit creation is depending upon a bank deposit or minimum liquidity ratio.
For any bank, it is not possible to give all its money to some-one on interest
or as loan because when some-one want to withdrawn its amount, who can any bank
pay to public.
So bank create credit after a liquidity ratio, bank always put
some amount in case so that he is able to pay on demand. There is a difference
in the interest rates which bank give to public and when a bank give a loan
to some-one or create credit, this difference is the main income sources of
bank. Every bank is able to give a loan or create credit to the equal to its
excess reserves. All banks also give loan or create credit equal to
multiple to the total excess amount.
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| Credit creation साख का निर्माण |
For example, if there are three banks
like X, Y, Z and every-one have a minimum liquid ratio is 10% &
total bank amount is Rs 100. So first bank give a loan of Rs 90 (100 – 10) then
this loan deposit to the bank (Y) by the person. This bank also holds a reserve
of 10% and gives rest of the money on loan 9 (90-9). Then third bank (Z) also
do the same thing & reserve the 10% and give rest the money on loan or
create credit.
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