CREDIT CREATION BY COMMERCIAL BANKS

PRESENTED BY# GROUP 4 ANURAG JAIN AMAR CHIGTERI ADITI BHARGAVA DEEP MEHROTRA ANKUR MATHUR ANUJ ARORA ANKITA MEHROTRA

SINGLE EXPANSION

BANK A-Share Capital Of Rs5,00,000 Balance Sheet Accept Deposits Of 3,00,000 From Z Balance Sheet CRR-15% In RBI SLR-35% In RBI Balance Sheet

Cont
Maintain Extra Reserves of 6,00,000 with RBI Balance Sheet Z Draws Cheque Of Rs.1,50,000 Against Bank A in Favour Of Y Y Deposits Cheque in Bank B Bank B sends Cheque to the Clearing Agency of RBI Bank As Required Liquid Assets goes down by Rs.52,500(Maintaining 35% SLR) Balance Sheet

Cont

Grants loan to X OF Rs.5,75,000,thereby Creating MONEY Gets a Promissory Note from X-Included under the head LOANS IN Balance Sheet Gets Demand Deposit(MONEY) for Promissory Note which is not MONEY Increase in holding of Liquid Assets by Rs.2,80,000,adjusted through Excess Reserves Balance Sheet X draws a Cheque of Rs.5,75,000 in favour of D

Cont
Amount of Cheque exceeds Banks Reserves with RBI i.e.Rs.2,93,750 Bank covers the diff. by depositing idle reserves with it i.e. Cash ofRs.1,02,500 & liquid reserves of Rs.2,01,250 Balance Sheet after clearance of Cheque

BUYING GOVT.SECURITIES

RBI accepts GOVT. BONDS in place of Liquid Assets by Commercial bank Balance Sheet of BANK P BANK P increases its Reserves with RBI to Rs.8,00,000 by depositing its Cash and Liquid Assets BANK buys Govt.Securities worth Rs.7,55,000in exchange for increase in Demand Deposits by the same amount Balance Sheet

Cont

Broker draws and clears Cheque Of Rs.7,55,00 against BANK P Demand Deposits & Reserves of BANK P with RBI will reduce by Rs.7,55,000 Reserves with RBI now, will be just meeting 15% CRR But BANK P has Securities of Rs.7.55,000 to meet its Liquid Assets Req. Balance Sheet at last

MULTIPLE EXPANSION
Ability of THE ENTIRE Banking system to create money RBI bought GOVT. Securities worth Rs.1000 from X X deposits Rs.1000 in BANK A 20% of new reserves have to be deposited to RBI BANK A lends 800 Rs. to Y Y deposits those 800 Rs with BANK B BANK B lends Rs 640 to Z

Cont
Z deposited that money with BANK C BANK C lends Rs 512 to P P deposit Rs 512 with BANK D BANK D keeps 20% as reserves with RBI and lends remaining 80% i.e.409.6 to P This very procedure goes on. New Money Created will be equal to-: 1000+800+640+512+409.6+. =1000* 1___ =Rs.5000 1-0.8

BALANCE SHEET(1)
LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL

5,00,000 5,00,000

CASH

5,00,000 5,00,000

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BALANCE SHEET(2)
LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL DEMAND DEPOSITS

5,00,000
3,00,000 8,00,000

CASH

8,00,000
__________ 8,00,000

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BALANCE SHEET(3)
LIABILITIE S CAPITAL DEMAND DEPOSITS AMOUN ASSETS T 5,00,000 CASH 3,00,000 RESERVES WITH RBI REQUIRED _________ LIQUID ASSETS _ 8,00,000 AMOUNT
6,50,000 45,000 1,05,000 _________ _ 8,00,000 BACK

BALANCE SHEET(4)
LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL
DEMAND DEPOSITS

5,00,000
3,00,000

CASH
RESERVES WITH RBI

50,000
6,45,000

__________ 8,00,000

REQ.LIQUID 1,05,000 ASSETS __________ 8,00,000

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BALANCE SHEET(5)
LIABILITIES AMOUNT ASSETS AMOUNT

CASH RESERVES REQ. LIQUID ASSETS

1,02,500 4,95,000 52,500

__________ 6,50,000

CAPITAL DEMAND DEPOSITS

5,00,000 1,50,000

__________ 6,50,000

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BALANCE SHEET(6)
LIABILITIE AMOUNT ASSETS S CAPITAL 5,00,000 CASH DEMAND 7,25,000 RESERVES DEPOSITS WITH RBI REQ. LIQUID ASSETS AMOUNT 1,02,500 2,93,750 2,53,750

_________ LOANS
12,25,000

5,75,000
12,25,000

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BALANCE SHEET(7)
LIABILITIE AMOUNT ASSETS S CAPITAL 5,00,000 CASH DEMAND 1,50,000 RESERVES DEPOSITS WITH RBI REQ. LIQUID ASSETS __________ LOANS 6,50,000 AMOUNT NIL 22,500 52,500

5,75,000 6,50,000

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BALANCE SHEET OF BANK P

LIABILITIES AMOUNT ASSETS CAPITAL DEMAND DEPOSITS AMOUNT 5,00,000 CASH 50,000 3,00,000 RESERVES 6,45,000 WITH RBI

REQ. LIQUID _________ ASSETS 8,00,000

1,05,000
_________ 8,00,000

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BALANCE SHEET OF BANK P AT LAST

LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL
DEMAND DEPOSITS

5,00,000
3,00,000

CASH
RESERVES WITH RBI

NIL
45,000

___________ SECURITIES 8,00,000

7,55,000 8,00,000

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BALANCE SHEET OF BANK P

LIABILITIES AMOUNT ASSETS AMOUNT

CAPITAL DEMAND DEPOSITS

5,00,000 CASH 10,55,000 RESERVES WITH RBI

NIL 8,00,000

___________ SECURITIES 7,55,000 15,55,000 15,55,000

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