Page 58 - DCOM208_BANKING_THEORY_AND_PRACTICE

Rupesh Roshan Singh, Lovely Professional University
Unit 4: Credit Creation

Unit 4: Credit Creation Notes

CONTENTS
Objectives
Introduction

4.1 Meaning of Credit Creation
4.1.1 Basis of Credit Creation
4.1.2 Contraction of Credit

4.2 Process of Credit Creation
4.3 Limitation of Credit Creation
4.4 Summary
4.5 Keywords
4.6 Review Questions

4.7 Further Readings

Objectives

After studying this unit, you will be able to:

Discuss the meaning of credit creation
Describe the basis of credit creation
Explain the process of credit creation

Discuss the limitations of credit creation
Introduction

In the previous unit, we dealt with the Indian Banking System and its classification. The unit also
discussed about the role and functions of RBI and various techniques of credit control. This unit
will help you to understand the meaning of credit creation. The various section and sub-section
of this unit will also summarize the process and limitations of credit creation.
Essentially, commercial banks are considered as dealers in credit. Interest is the pricing factor
that directs them in building business decision. These banks were initially started as institutions
for meeting the short term credit requirements of trade industry and commerce and even today,
it remains their primary function. In view of that requirement, the legal framework never put
restrictions on the credit creation power of these banks. However, legislation always required
the central bank of each country to oversee and control that power so that it may not be used to
the detriment of social well-being.

4.1 Meaning of Credit Creation

Credit creation is one of the essential functions of a commercial bank. The term credit can be
defined in both narrow and broad senses. In broad terms, credit is finance that is made available

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