Process of Credit Creation by Commercial Banks | Clear Concept

Welcome to visit the page. We are going to know the process of credit creation by commercial banks. The commercial bank is a financial intermediary. The central bank and the government created the money and the commercial bank introduced the money. If the money cannot be created, the commercial banks increase the utility and purchasing power of money through various methods and loans through loans. And this is called the creation of credit deposits in the name of the bank. And it’s the process of credit creation by commercial banks.

Process of Credit Creation by Commercial Banks
Process of Credit Creation by Commercial Banks

Process of Credit Creation by Commercial Banks

The commercial bank has two types of deposits, and the two processes have been discussed below. Once is ‘Loan Creations from Deposit’ and another ‘Deposit Creation through Loan. So stay with us and achieve your required information from here. Also, we have additional info for you. These are the primary functions of commercial banks and the Characteristics of commercial banks.

Loan Creation from Deposit

The commercial banks will pay back the people’s lazy money through various deposits and refund them. But the depositors do not take all the money at the same time. Occasionally, according to the needs taken. So, without taking all the money deposited by the bank, the profits earned by investing in some profitable sectors can be made from some portion of the bank. Thus, the bank creates debt deposits by making and contracting loans. Through these actions, the commercial banks make loans from deposits so that it called ‘Loan Creation from Deposit’. After all, it is the first process of credit creation by the commercial bank through loan creation from the deposit.

Deposit Creation through Loan

Deposit Creation through Loan is the second process of credit creation by a commercial bank. However, In 5 ways, commercial banks create deposits through debt. So come to the point and justify these 5 ways.

Deposit Creation through Loan
Deposit Creation through Loan

1. Investment

Commercial banks invest money in shares, bonds, securities etc. Since it is deposited in any bank, the bank creates a debt deposit from that deposit. So investment is the first ways of deposit creation through loan.

2. Loan at call & loan payable at short notice

The commercial bank offers only the demands of borrowers and short-term loans through current accounting. The borrowers pick up the money as needed. Therefore, the bank makes a loan deposit by repaying it from that money.  So the loan at call and loan payable at short notice is the second way of deposit creation through loan.

3. Bill Discounting

Bill discounting is the third way of the deposit creation through loan. The commercial bank exchanges the bill by purchasing the Bill with an interest. So this check is deposited in any bank. And from there it made the bank debt deposits. Therefore, all these activities are involved with bill discounting.

4. Purchasing Assets

Since commercial banks are purchasing the assets and paying them through check, As a result they help in generating credit deposits. The person who sells the wealth will not pick up the money and take it slowly through the check. As a result, debt deposits will be created. Therefore, the purchasing assets are the fourth number of the way from deposit creation through loan.

5. Through Bank Overdraft

Bank provides Bank Overdraft credit for the needs of the customers. The loan will also be credited to the credit bank in the form of the amount of loan deposited. The overall process of the bank is managed to generate credit deposits.

However, we coming at the end of the page. I hope, I completed explaining the process of credit creation by commercial banks successfully. Overall have completed the two process loan creation from the deposit and the deposit creation through a loan. If you want to know the additional information then comment on yourselves.