Creation of credit is one of the crucial functions performed by a commercial bank in modern times. The commercial bank is responsible for putting money (produced/created by central bank) in circulation through the process of credit creation or the lending process.
Numercial Illustration, may be based on the following assumption:
(i) There is only one bank in the economy.
(ii) Initial deposits are say Rs.10000 crores and the legal reserve requirement proposed by the central bank is 10%.
(iii) Credit Creation = Initial deposits x 1/LRR
= 10000/0.1
= Rs.100000 crores
Students may provide a schedule for deriving the same.
