Question

What do you mean by credit-creation? Explain the various measures of credit control.

Hint:

Credit-creation is the ability of commercial banks to generate new money through lending. The central bank controls this through tools like CRR, bank rate, and open market operations.

Answer 1

- Credit Creation refers to the process through which commercial banks create credit or money by lending out a portion of the deposits they receive. When a bank lends money, it does not reduce the money supply; instead, it creates new credit in the form of loans, which adds to the money circulating in the economy. 

- Measures of Credit Control: 

1. Open Market Operations (OMO): The buying and selling of government securities in the open market by the central bank to regulate the money supply.

2. Cash Reserve Ratio (CRR): The minimum amount of reserves that commercial banks are required to hold with the central bank. Increasing CRR limits credit creation. 

3. Bank Rate Policy: The rate at which the central bank lends to commercial banks. A higher bank rate makes borrowing more expensive and limits credit creation. 

4. Statutory Liquidity Ratio (SLR): The percentage of a commercial bank's net demand and time liabilities that it must maintain in the form of liquid assets like cash, gold, or government securities.