Monday, February 23, 2009

Creation of Credit

Creation of credit is one of the most outstanding function of modern banks. The commercial banks create multiple expansion of their bank deposits and due to this say have sometimes been called manufacturers of credit. The notes and currency issued by the central bank is not the only form of money. The supply of money also includes some sort of credit money in addition to real cash money.

The commercial banks extend loans by much more than the amount of cash possessed by them. This tendency of deposit making by customers and lending more loans by bank in excess of its fund is called ‘creation of credit’.

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