Test: Credit Creation - B Com MCQ

The text states that there exists an indirect relationship between credit creation and the cash reserve ratio (CRR). A higher CRR means that banks have to maintain more reserves and, therefore, have less excess reserves available for lending. This limits the amount of credit creation by commercial banks. On the other hand, a lower CRR means that banks have to maintain fewer reserves and have more excess reserves, allowing for more credit creation. Interesting additional fact: The cash reserve ratio is set by the central bank, such as the Reserve Bank of India (RBI) in India. It is used as a monetary policy tool to control the money supply in the economy. By adjusting the CRR, the central bank can influence the amount of credit creation by commercial banks and regulate economic activity.

The text mentions that "external drain" refers to the withdrawal of cash from the banking system by the public. This means that when depositors withdraw cash from their accounts, it lowers the reserves of the banks and limits the ability of banks to create credit. Interesting additional fact: External drain can occur when individuals prefer to hold cash instead of keeping it in the banking system. It can be influenced by factors such as economic uncertainty, preference for liquidity, or lack of trust in the banking system. The central bank monitors and manages external drain to ensure the stability of the banking system and the availability of credit.

The text states that credit creation by commercial banks is controlled by the central bank. The central bank, such as the Reserve Bank of India (RBI), has the authority to regulate and influence the credit creation process. It uses various methods of credit control to manage the money supply in the economy, including adjusting the cash reserve ratio and implementing monetary policy measures. Interesting additional fact: The central bank plays a crucial role in maintaining financial stability and managing economic growth. By controlling credit creation, the central bank can mitigate the risks of excessive lending, inflation, and financial instability. It acts as a regulator and supervisor of the banking system to ensure the smooth functioning of credit creation and the overall economy.

The text mentions that the banking habits of the people can affect the credit creation process. If people have well-developed banking habits and conduct most of their transactions through banks, it can lead to an expansion of credit. On the other hand, if people are not willing to borrow from banks, it can limit the credit creation by commercial banks. Interesting additional fact: The willingness of people to borrow is influenced by various factors such as interest rates, economic conditions, and individual financial situations. When people are confident about the economic outlook and have access to favorable borrowing conditions, they are more likely to borrow and contribute to credit creation.

The text states that the ability of banks to create credit depends on the fact that banks need only a small percentage of cash to deposits. This means that the amount of deposits made by the depositors is the basis of credit creation in commercial banks. Banks can lend and create credit based on the excess reserves they have, which is the remaining amount after keeping a fixed percentage of deposits in cash reserves. Interesting additional fact: Credit creation plays a crucial role in the economy as it allows banks to provide loans and support economic activities. By creating credit, banks can stimulate investment, consumption, and overall economic growth.

The text mentions that loans are sanctioned by banks based on the securities provided. If securities are available, banks can provide loans and create credit. Therefore, securities play a role in determining the supply of credit in the credit creation process. Interesting additional fact: Securities can include collateral, such as property or assets, which borrowers pledge to secure a loan. Banks evaluate the value and quality of the securities to determine the amount of credit they can provide. The presence of sufficient and reliable securities increases the lending capacity of banks and supports credit creation.

The text mentions that if all commercial banks follow a uniform policy related to the cash reserve ratio (CRR), credit creation would be smooth. This means that the monetary policy of the central bank, such as the Reserve Bank of India (RBI), plays a role in ensuring uniformity in credit creation among commercial banks. Interesting additional fact: The monetary policy of the central bank includes various tools and measures to regulate the money supply, interest rates, and credit availability in the economy. By setting consistent guidelines and policies, the central bank can promote stability, fairness, and efficient credit creation across commercial banks.

The text provides an example where the initial change in cash reserves is Rs. 1000 and the required reserve ratio (RRr) is fixed at 10%. By applying the formula, the maximum increase in demand deposits is calculated to be Rs. 10000. This represents a credit creation of 90% (Rs. 10000 / Rs. 1000 = 10). Interesting additional fact: The credit creation process allows banks to expand the money supply in the economy by providing loans and creating new deposits. The maximum percentage of credit creation depends on factors such as the cash reserve ratio, the amount of reserves held by banks, and the willingness of borrowers to take loans.

The text mentions that the banking habits of the people can affect the credit creation process. If people have well-developed banking habits and conduct most of their transactions through banks, it can lead to an expansion of credit. On the other hand, if people are not willing to borrow from banks, it can limit the credit creation by commercial banks. Interesting additional fact: The willingness of people to borrow is influenced by various factors such as interest rates, economic conditions, and individual financial situations. When people are confident about the economic outlook and have access to favorable borrowing conditions, they are more likely to borrow and contribute to credit creation.

The text states that the ability of banks to create credit depends on the fact that banks need only a small percentage of cash to deposits. This means that the amount of deposits made by the depositors is the basis of credit creation in commercial banks. Banks can lend and create credit based on the excess reserves they have, which is the remaining amount after keeping a fixed percentage of deposits in cash reserves. Interesting additional fact: Credit creation plays a crucial role in the economy as it allows banks to provide loans and support economic activities. By creating credit, banks can stimulate investment, consumption, and overall economic growth.