So I build this nice looking building that people would feel comfortable keeping their money in-- and that could actually be safe for safekeeping. Benham has mentioned three limitations on the powers of the banks to create credit: i The amount of cash in the country; ii The amount of cash which the public wishes to hold; and iii The minimum percentage of cash to deposits, called cash revenue ratio which the banks have to maintain. The smaller the cash reserve ratio the large the expansion of deposits or credit. Critics of the current banking system are calling for for this reason. The total deposit created by the commercial banks constitutes the money supply by the banks.
Bank credit has become these days an important constituent of the money supply in the country. Most businesses and companies have their own rules and regulations for credit extension. Those people gave them something, whether it's gold or a green piece of paper, that essentially says, this gold or this green piece of paper entitles you to some future goods and services. So at any given day, not everyone-- hopefully not everyone's-- going to pull their money out or put their money in. After maintaining the required reserves, the bank can lend the remaining portion of primary deposit and here the process of credit creation starts. Thus, the excess cash reserve, that is, the amount of cash realised in excess of requirements, can be used to create derivative deposits.
If Bank of Baroda expanded its loans and deposits by the amount of its excess reserves, its balance sheet would then change to The balance sheet shows that Canara Bank now has an excess reserve of Rs. It plays a vital role in business finance. Let me draw my balance sheet. So let's say that I charge 10% on this money. The customers may hold the cash with them which affects the credit creation by banks. Bank cannot lend entire primary deposits as they are required to maintain a certain proportion of primary deposits in the form of reserve with the Central bank and Banking regulation act. When the bank advances a loan it opens an account in the name of the customer.
But the commercial banking system, as a whole, can expand credit many times over the initial excess reserves. Modern state that the central bank does not have the option to monetize any of the outstanding government debt or newly issued government debt. I'll do it in a little more detail in the next video. I'm taking their money as safekeeping. The main purpose of keeping this reserve is to fulfill the transactions needs of depositors and to ensure safety and liquidity of commercial banks. This tendency on the part of the banks to lend more than the amount of cash possessed by them is called Creation of credit in Economics. I have no claims on any goods and resources, but I have an idea.
The borrower can deposit the amount with the bank. And we'll talk in the future about inflation and deflation and the fact that there is a constraint on how much gold can be produced, but you can print money. At other times, banks will make investment loans themselves, especially to businesses that are interested in growth or acquisitions. I have a fairly wealthy village. It's hard for these people to evaluate who has savings.
It thus creates a deposit. S deposits the amount of Rs. They go to the opposite extreme. A bank's demand deposits arise mainly from: i cash deposits by customers, and ii bank loans and investments. In the example set out in Fig.
The borrower can deposit the amount with the bank. The third limitation is the most important. I'm actually one of these entrepreneurs. The description of the process differs in analysis. The modern banking system can expand the money supply of a country beyond the amount created or targeted by the central bank, creating most of the in the system through.
And balance sheets, as you see, they were useful even in primitive cultures. In many cases, the letter of credit now must be paid—even if something happens to the shipment. There are some groups of countries, for which, through agreement, a single entity acts as their central bank, such as the organization of states of Central Africa, which all have a common central bank, the , or monetary unions, such as the , whereby nations retain their respective central bank yet submit to the policies of the central entity, the. The money that commercial banks supply is called credit money. Willingness of banks to lend money c.