Banking system can create unlimited amount of credit expansion of deposits.But In reality, the power bank is to create multiple credit or deposits are subject to a number of limitations.
-> Amount of Cash : Larger the amount of cash with the banking system greater will be the credit creation and vice-versa
->Cash Reserve Ratio : The second limiting factor of credit creation power of bank is cash reserve ratio. Lower the cash reserve ratio, higher the credit creation power and higher the cash reserve ratio,lower will be the credit creation power of the banks.
-> Availability of Borrowers : Banks create credit means of loans and advances .Therefore the extent of credit creation depends on the availability of borrowers.If there are no borrowers there will be no credit creation.
->Availability of Securities : The banks can grant loans only against the approve securities.Hence ,higher the availability of approved securities higher will be the credit creation power of the banks.
->Banking Habits : Development of banking system and the habits of the people also influences the credit creation power of the banks.
->Business Conditions : Credit creation is further limited by the nature of business conditions.During depression,when due to low profit expectations business man do not come forward to borrow from banks,credit creation will be very small.On the other hand,during the period of business prosperity ,the profit expectations are high .The businessman approach the banks for loans and there will be greater ,creation will be smaller during depression and larger during business prosperity.
->Monetary policy of Central Bank : One of the important functions of central bank is to control credit creation and power of the commercial banks in the country ,To control the credit creation power of the banks ,the central bank adopt different policies such as bank rate policy ,open market operations ,cash reserve ratio.Hence the credit creation power of the bank depend upon the central bank policy.
->Leakages : The actual credit creation of the banking system may be considerably smaller than the potential credit creation due to certain leakages.Following are the two leakages in the credit creation process of the banks.
->Excess Reserve : The bank may not be willing to utilize their surplus funds over the cash reserve ratio and decide to maintain excess reserve.
->Currency Drains : The cash withdrawals (or) currency drains reduces the power of hte banks to create credit.
No comments:
Post a Comment