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’.

Customer

It is clearly established that the word “customer” generally denotes a relationship resulting from habit or continued dealings, but for a bank customer this habit of dealing is not essential. The person who has an account with a bank is known as an account holder or customer of that bank.

According to Lord Lindly:
“A customer is a person who has some sort of account, either deposits or current account or same other relationship with a banker.”

According to Dr. Hart:
“A customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such.”

Law of Demand

When price of a good goes up, people buy less of it and when prices goes down, people buy more it, other things being unchanged, it is called Law of Demand.

Prof. Alfred Marshall states the law of Demand as under:
“For the higher sale of the amount of a commodity, its price should fall or when the price falls, the quantity demanded increases and on the contrary, when the price rises, the demand falls provided other things remain the same.”

If different factor like consumer’s income, taste of the consumer, traditions, fashion, habits, prices of the substitute goods etc. will change, the Law of Demand will fail to operate.

What is Demand?

The word ‘demand’ is used as a term in Economics. Common meaning of word ‘demand’ is ‘desire’ but there is a difference in ‘desire’ and ‘demand’ as a term in Economics. If any thing is desired only, it will not be called demand in Economics. The desire, to become a demand, should have the backing of purchasing power or money.

The desire to purchase any thing depends on the demanded price of the commodity. The higher is the price, lower will be the demand. On the contrary, the lower is the price lesser will be the demand. No one can decide about the quantity or amount of a commodity to purchase so long he does not know about the price of the same.

The price that a buyer wants to pay for a certain quantity of a commodity is called ‘Demand Price’. The term ‘Demand’ may be defined as “The human desire of a commodity is called Demand which has support of purchasing power.”

Role of Central Bank in Economic Development

The economic stability of a country is solely dependent on the central bank. It is the only financial institution in the country which is responsible for regulating the banking and monetary system of the country. The need of central bank in a country is essentially felt considering the following services rendered by a central bank for economic development of a developing country.

1. Capital Formation: Economic progress of a country requires adequate amount of capital. Capital is required for agriculture, industrial and commercial development. But in a developing country, it is a chronic problem to procure capital. Central bank as a national institution plays prime role in capital formation in the interest of the nation as a whole. As the guardian of the money market, it regulates the capital flow in the country in proper form and suitable time.

2. Credit Control: Credit is one of the most important source of financing trade and industry. The central bank as the controller of credit can encourage a particular sector of economy by adopting selective credit control.

3. Stability in Prices: The central bank keeps the price level stable in the country by controlling money and credit supply.