Process through which commercial banks create money

1. AKS UNIVERSITY

2. PRESENTED BY:-
AKASH SAHU

3. ON
MONEY CREATION

4. CONTENTS:-
1. INTRODUCTION
2. ASSUMPTIONS
3. LEGAL RESERVE
RATIO
4. PROCESS OF MONEY
CREATION
 PHASE 1
 PHASE 2
 PHASE 3
 PHASE 4
5. MONEY MULTIPLIER

5.  It is a process.
 Throug which
bank can create
credit from the
initial deposit.
 Also known as
credit creation

6.  Entire commercial
banks are single
unit.
 All receipts and
payments in the
economy are made
through banks.

7. •
Cash
Reserve
RatioCRR
•
Statutory
Liquidity
RatioSLR
 Certain percentage of
total bank deposits are
to be kept in current
account with RBI.
 Requirement to
maintain in the form of
gold, gov. approved
securities

8. Let us understand the process through an example…
 Suppose initial deposits in bank is Rs.10000 and
LRR be 20%.Therefore, Rs.2000 will be kept as
reserves
 And bank is free to lend Rs. 8000(100%-20%)as
loan.
 Bank does not lend this money in the form of cash.
Rather, bank open an account in the name of
borrower and transfer the amount into that account.

9.  Now suppose, borrower withdraw the entire amount
for making payments.
 Here It is assume that all the payments are made
through cheque.
 Therefore all the cash get back to the the bank in the
form of deposits.
 This time deposit will come from the account to
whom the payment is made.
 This will increase the deposits by Rs. 8000.

10.  With the new deposits of Rs.8000,Bank will keep
Rs.1600 (20% of deposits) as reserve and lend
Rs.6400.
 Borrower use this amount to make payment which
again comes back again into the bank in the
account of those who have received the payments.
 This time bank deposit rise by Rs.6400.
 The deposits keep on increasing in each round by
80% of the last round. At the same time cash
reserve will also increase each time by 80%.

11. DEPOSITS creation will come to an end when total
cash reserves become equal to the initial deposit.
Rounds Deposits Loans LRR(20%)
Initial
deposits
1000 800 200
Round1 800 640 160
Round2 640 512 128
… … … …
… … … …
Total 5000 4000 1000

12. Money multiplier measures the amount of money
that the banks are able to create in the form of
deposits and with every unit it keeps as reserves.

13. THANK YOU