Introduction:
Commercial banks play a crucial role in the creation of money supply in the economy. Through a process called fractional reserve banking, banks are able to expand the money supply by lending out a portion of the deposits they receive. This process has a multiplier effect, as each new loan creates additional deposits, thereby increasing the overall money supply.

1. Fractional Reserve Banking:
Commercial banks are required to keep only a fraction of their deposits as reserves, which is set by the central bank. For example, if the reserve requirement is 10%, a bank can lend out 90% of the deposits it receives.

2. Deposit Creation:
When a person or business deposits money into a bank, it becomes a liability for the bank and an asset for the depositor. The bank can then use a portion of this deposit to extend loans and create new money.

3. Loan Disbursement:
When a bank approves a loan, it credits the borrower's account with the loan amount. This increases the borrower's deposits, which are now available to be spent in the economy. The borrower then uses these funds to make purchases or payments, thereby injecting new money into circulation.

4. Money Multiplier Effect:
The process of lending and deposit creation continues as the recipients of these loans deposit the funds into their own bank accounts. This leads to another round of lending and deposit creation, further increasing the money supply. The amount of money created through this process depends on the reserve requirement set by the central bank.

5. Impact on Money Supply:
By repeatedly lending out a fraction of the deposits they receive, commercial banks effectively create new money. This expansion of the money supply stimulates economic activity and promotes investment, as businesses and individuals have access to additional funds for spending and investment purposes.

Conclusion:
Commercial banks play a pivotal role in the creation of money supply in the economy through the process of fractional reserve banking. By lending out a portion of the deposits they receive, banks are able to multiply the money supply, thereby fueling economic growth and development. This process of deposit creation and lending has a multiplier effect, as each new loan generates additional deposits, resulting in the expansion of the overall money supply.

The commercial banks contributes to the money supply by the way of credit creation. The process is as under :-
Banks receive cash deposits from the people . These are called primary deposits.
Banks lend money many more times than their cash reserves.
Money is lent by the commercial banks not in the form of cash , but in the form of credit entry in the account of borrowers . These credit entries are known as secondary deposits.
The borrowers can issue cheques against the loans. THESE CHEQUES CIRCULATE IN THE ECONOMY AS MONEY.
Primary deposits + Secondary deposits = Demand deposits held by the people in the commercial banks.
TOTAL DEMAND DEPOSITS WITH THE BANKS ARE MANY TIMES MORE THAN THEIR CASH RESERVES. THIS IS BECAUSE THE COMMERCIAL BANKS ( BY THE WAY OF HISTORICAL EXPERIENCE ) KNOW THAT ALL THE DEPOSITORS WOULD NOT SHOW UP IN THE BANKS TO WITHDRAW ALL THEIR DEPOSITS.
If experience shows that withdrawl are generally up to around 10% of demand deposits , the banks need to keep only 10% of deposits as cash reserves.
All demand deposits held by the people serve as money supply in the economy. Hope it helps !