Credit Creation
CHAPTER –6
Credit creation by commercial Bank
Demand deposits as money
Bank deposits are two types.
1. Demand Deposit 2. Time deposit
The demand deposits on which cheques are issued are also called as cash deposits or current deposits.
D.D are therefore, almost as good as cash money the depositor can convert a part or the whole of the current account in currency notes at any time.
According to T.T Sethi “A demand deposit is the obligation of a bank to pay a certain sum of money to a specified individual (depositor) on demand.”
2. Primary and derivative Deposits
Demand deposits can be classified into two categories-- a. Primary deposit b. derivative or passively and actively created deposit.
a) Primary deposit = current deposit + saving deposit
T.T Sethi “ primary deposits arise from the actual deposits of cash( or cheques and other claims on cash) in a bank account
b) Derivative deposits: derivative deposits are created by bank based on the strength of primary deposits.
D.D created by the bank through their operating strategies.
T.T Sethi “ Derivative deposits actively created by the bank creating claims against itself in favor of a borrower or of a seller of assets or securities acquired by the bank”.
Derivative deposits can be created by two ways: a) Deposits created by sanctioning credit b) Deposits created by purchasing assets or securities Derivative deposit also called secondary deposit.
3. The process of multiple credit expansion a) The process of multiple credit/ deposit expansion by a monopoly bank : Assumption: 1. Let us assume a situation in which there is only one bank 2. The area in which all payments are made without cash 3. All payments are made by means of book transfers from one current account to another. 4. 4. There is thus no external drain of cash as a consequence of the expansion of the demand deposit. 5. What role play by a monopoly bank to multiple credit
Credit creation by commercial Bank
Demand deposits as money
Bank deposits are two types.
1. Demand Deposit 2. Time deposit
The demand deposits on which cheques are issued are also called as cash deposits or current deposits.
D.D are therefore, almost as good as cash money the depositor can convert a part or the whole of the current account in currency notes at any time.
According to T.T Sethi “A demand deposit is the obligation of a bank to pay a certain sum of money to a specified individual (depositor) on demand.”
2. Primary and derivative Deposits
Demand deposits can be classified into two categories-- a. Primary deposit b. derivative or passively and actively created deposit.
a) Primary deposit = current deposit + saving deposit
T.T Sethi “ primary deposits arise from the actual deposits of cash( or cheques and other claims on cash) in a bank account
b) Derivative deposits: derivative deposits are created by bank based on the strength of primary deposits.
D.D created by the bank through their operating strategies.
T.T Sethi “ Derivative deposits actively created by the bank creating claims against itself in favor of a borrower or of a seller of assets or securities acquired by the bank”.
Derivative deposits can be created by two ways: a) Deposits created by sanctioning credit b) Deposits created by purchasing assets or securities Derivative deposit also called secondary deposit.
3. The process of multiple credit expansion a) The process of multiple credit/ deposit expansion by a monopoly bank : Assumption: 1. Let us assume a situation in which there is only one bank 2. The area in which all payments are made without cash 3. All payments are made by means of book transfers from one current account to another. 4. 4. There is thus no external drain of cash as a consequence of the expansion of the demand deposit. 5. What role play by a monopoly bank to multiple credit