Credit creation by commercial banks is the process of the creation of credit or money by banks when they lend money to borrowers. This process involves a series of steps that lead to the creation of credit, which is then used by borrowers to purchase goods and services.

Process of credit creation by commercial banks:

1. Deposit mobilization - The first step in the process of credit creation by commercial banks is deposit mobilization. Banks mobilize deposits from their customers, which are then used to create credit. For example, if a customer deposits Rs. 10,000 in a bank, the bank can use this money to create credit.

2. Reserve Ratio - Banks are required to maintain a certain reserve ratio, which is the ratio of reserves to deposits. The reserve ratio is set by the central bank and is usually around 10%. This means that for every Rs. 100 deposited, the bank must keep Rs. 10 as reserves.

3. Lending - Once the bank has mobilized deposits and maintained reserves, it can then lend money to borrowers. For example, if a borrower wants to borrow Rs. 5,000, the bank can lend this money to the borrower.

4. Deposit creation - When the bank lends money, it creates a deposit for the borrower. For example, if the bank lends Rs. 5,000 to a borrower, it creates a deposit of Rs. 5,000 in the borrower's account. This deposit can then be used by the borrower to make purchases.

5. Repeat the process - The process of credit creation can be repeated again and again. When the borrower spends the money, the money is deposited in another bank, which can then use it to create more credit.

Numerical example:

Let's assume that a bank has Rs. 1,000 as deposits and a reserve ratio of 10%. The bank can lend Rs. 900 (90% of its deposits) to borrowers. When the bank lends Rs. 900, it creates a deposit of Rs. 900 in the borrower's account. The borrower can then use this deposit to make purchases, creating more deposits in other banks. As a result, the total amount of credit created in the economy is greater than the initial deposit. This is the process of credit creation by commercial banks.

Credit creation is the process of expansion of credit through secondary deposits it is done by commercial bank with the motive of earning interest income. Commercial bank explain their credit on the basis of primary deposits and cash reserve ratio/ liquidity reserve ratio. Bank gives a reserve amount of deposit for customer to with
drawal and lend the remaining amount to some other person.How ever amount lend is credited in borrowers account known as secondary deposit become primary deposit of some other bank which keeps a reserve amount out of it and lend excess cash to other. This process continuous and a size of amount of credit creation by commercial bank .It is given by following formula.
Total money credit =primary deposit ×1/LRR
let primary deposit=100 cr,LRR=0.2
Total credit creation=100×10/0.2=500cr