CREDIT CREATION BY

COMMERCIAL BANKS
PRESENTED BY# GROUP 4
ANURAG JAIN
AMAR CHIGTERI
ADITI BHARGAVA
DEEP MEHROTRA
ANKUR MATHUR
ANUJ ARORA
ANKITA MEHROTRA
 SINGLE EXPANSION

 BANK A-Share Capital Of Rs5,00,000

 Balance Sheet
 Accept Deposits Of 3,00,000 From Z
 Balance Sheet
 CRR-15% In RBI
 SLR-35% In RBI
 Balance Sheet
 Cont……
 Maintain Extra Reserves of 6,00,000 with RBI
 Balance Sheet
 Z Draws Cheque Of Rs.1,50,000 Against Bank A in Favour Of Y
 Y Deposits Cheque in Bank B
 Bank B sends Cheque to the Clearing Agency of RBI
 Bank A’s Required Liquid Assets goes down by
Rs.52,500(Maintaining 35% SLR)
 Balance Sheet
 Cont……
 Grants loan to X OF Rs.5,75,000,thereby Creating MONEY
 Gets a Promissory Note from X-Included under the head
‘LOANS’ IN Balance Sheet
 Gets Demand Deposit(MONEY) for Promissory Note which is
not MONEY
 Increase in holding of Liquid Assets by Rs.2,80,000,adjusted
through Excess Reserves
 Balance Sheet
 X draws a Cheque of Rs.5,75,000 in favour of D
 Cont……
 Amount of Cheque exceeds Bank’s Reserves with RBI
i.e.Rs.2,93,750
 Bank covers the diff. by depositing idle reserves with it i.e. Cash
ofRs.1,02,500 & liquid reserves of Rs.2,01,250
 Balance Sheet after clearance of Cheque
 BUYING GOVT.SECURITIES
 RBI accepts GOVT. BONDS in place of Liquid Assets by
Commercial bank
 Balance Sheet of BANK P
 BANK P increases its Reserves with RBI to Rs.8,00,000 by
depositing its Cash and Liquid Assets
 BANK buys Govt.Securities worth Rs.7,55,000in exchange for
increase in Demand Deposits by the same amount
 Balance Sheet
 Cont……
 Broker draws and clears Cheque Of Rs.7,55,00 against BANK P
 Demand Deposits & Reserves of BANK P with RBI will reduce
by Rs.7,55,000
 Reserves with RBI now, will be just meeting 15% CRR But
BANK P has Securities of Rs.7.55,000 to meet its Liquid Assets
Req.
 Balance Sheet at last
 MULTIPLE EXPANSION
 Ability of THE ENTIRE Banking system to create money
 RBI bought GOVT. Securities worth Rs.1000 from X
 X deposits Rs.1000 in BANK A
 20% of new reserves have to be deposited to RBI
 BANK A lends 800 Rs. to Y
 Y deposits those 800 Rs with BANK B
 BANK B lends Rs 640 to Z
 Cont……
 Z deposited that money with BANK C
 BANK C lends Rs 512 to P
 P deposit Rs 512 with BANK D
 BANK D keeps 20% as reserves with RBI and lends remaining
80% i.e.409.6 to P
 This very procedure goes on…….
 New Money Created will be equal to-:
 1000+800+640+512+409.6+….
 =1000* 1___ =Rs.5000
1-0.8
 BALANCE SHEET(1)
LIABILITIES AMOUNT ASSETS AMOUNT
CAPITAL 5,00,000 CASH 5,00,000
5,00,000 5,00,000

BACK
 BALANCE SHEET(2)
LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL 5,00,000 CASH 8,00,000

DEMAND
DEPOSITS 3,00,000 __________
8,00,000 8,00,000

BACK
 BALANCE SHEET(3)

LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL 5,00,000 CASH 6,50,000

DEMAND 3,00,000 RESERVES 45,000
DEPOSITS WITH RBI
REQUIRED 1,05,000
_________ LIQUID _________
_ ASSETS _
8,00,000 8,00,000

BACK
 BALANCE SHEET(4)
LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL 5,00,000 CASH 50,000

DEMAND 3,00,000 RESERVES 6,45,000
DEPOSITS WITH RBI
REQ.LIQUID 1,05,000
__________ ASSETS __________
8,00,000 8,00,000

BACK
 BALANCE SHEET(5)
LIABILITIES AMOUNT ASSETS AMOUNT
CASH 1,02,500 CAPITAL 5,00,000
RESERVES 4,95,000 DEMAND 1,50,000
DEPOSITS
REQ. LIQUID 52,500
ASSETS
__________ __________
6,50,000 6,50,000

BACK
 BALANCE SHEET(6)
LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL 5,00,000 CASH 1,02,500

DEMAND 7,25,000 RESERVES 2,93,750
DEPOSITS WITH RBI
REQ. LIQUID 2,53,750
ASSETS

_________ LOANS 5,75,000

12,25,000 12,25,000

BACK
 BALANCE SHEET(7)
LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL 5,00,000 CASH NIL

DEMAND 1,50,000 RESERVES 22,500
DEPOSITS WITH RBI
REQ. 52,500
LIQUID
ASSETS
__________ LOANS 5,75,000
6,50,000 6,50,000

BACK
BALANCE SHEET OF BANK P
LIABILITIES AMOUNT ASSETS AMOUNT
CAPITAL 5,00,000 CASH 50,000
DEMAND 3,00,000 RESERVES 6,45,000
DEPOSITS WITH RBI
REQ. 1,05,000
LIQUID
_________ ASSETS _________
8,00,000 8,00,000

BACK
 BALANCE SHEET OF BANK P AT
LAST
LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL 5,00,000 CASH NIL

DEMAND 3,00,000 RESERVES 45,000
DEPOSITS WITH RBI
___________ SECURITIES 7,55,000
8,00,000 8,00,000

BACK
 BALANCE SHEET OF BANK P
LIABILITIES AMOUNT ASSETS AMOUNT
CAPITAL 5,00,000 CASH NIL
DEMAND 10,55,000 RESERVES 8,00,000
DEPOSITS WITH RBI
___________ SECURITIES 7,55,000
15,55,000 15,55,000

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