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Credit Creation and Credit Control

The document discusses credit creation and credit control, highlighting their importance in the economy. Credit creation refers to banks expanding the money supply through lending, while credit control involves central banks regulating this process to maintain economic stability and control inflation. It also outlines the roles of commercial banks and various monetary policy tools used to influence credit availability and the money supply.

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10 views

Credit Creation and Credit Control

The document discusses credit creation and credit control, highlighting their importance in the economy. Credit creation refers to banks expanding the money supply through lending, while credit control involves central banks regulating this process to maintain economic stability and control inflation. It also outlines the roles of commercial banks and various monetary policy tools used to influence credit availability and the money supply.

Uploaded by

jain.mehak1106
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Credit

creation and
credit control
Group 10
Introduction
To credit creation and credit control

7/29/20XX Employee orientation 2


Credit is the money that banks lend to
individuals, businesses, or governments. It plays
a crucial role in the economy by increasing
spending and investment. However, excessive
credit can lead to inflation, so it must be
controlled.Meaning of Credit Creation and Credit
Control
• Credit Creation: The process by which
commercial banks expand the money supply by
lending more than their actual deposits.
• Credit Control: The regulation of credit by
central banks (like the RBI or Federal Reserve)
to control inflation and economic
stability.Process of Credit Creation
1. A person deposits ₹10,000 in a bank.
2. The bank keeps a portion (say 10%) as
reserves (₹1,000) and lends out the rest
(₹9,000).
3. The borrower spends the ₹9,000, and it gets
deposited in another bank.
4. The new bank again keeps 10% (₹900) and
lends the remaining ₹8,100.
5. This cycle continues, multiplying the total
7/29/20XX
moneyEmployee
in circulation.
orientation 3
Advantages and disadvantages
The advantages of credit creation for an economy are similar
to money being available to people as a medium of
exchange Thus, these include,
1.Enable efficient monetary policy.
2.Stabilize the economy along with a mandatory reserve
system
3.Mitigates inflation
4.Makes credit available to poorer sections of society, leading
to inclusive growth.
5.Wider access to consumer good and investment
opportunities.
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The credit creation theory has some limitations, which may limit credit creation due to
various macroeconomic factors,
1.The inverse relationship between CRR and the credit multiplier. Thus, a very high CRR will
limit credit creation by commercial banks.
2.Central banks' role as lender of last resort and their responsibility to maintain inflation and
ensure economic growth simultaneously poses certain restrictions on commercial banks.
Additionally, central banks use quantitative measures to control credit and money supply.
3.Situations like natural calamities or pandemics severely limit the credit-generating capacity
of the banks. It is because people are not willing to take loans.
4.Deposits form the basis for credit creation by central bank and commercial banks. Thus,
a bank with a low base of deposits will generate less credit.
5.People who do not have potential security as collateral cannot avail of credit.

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Role of commercial banks
Commercial banks are financial institutions that provide services like lending,
investment, and social transformation. The Cash Reserve Ratio (CRR) is a policy
that requires commercial banks to keep a portion of their deposits with the Reserve
Bank of India (RBI). The CRR affects the money supply in the economy and helps
control inflation.
Lending: Commercial banks lend money to individuals and businesses.
Investment: Commercial banks offer investment products like mutual funds,
bonds, and options.
Social transformation: Commercial banks promote financial inclusion and support
economic growth.
Role of CRR
Money supplyThe CRR affects the money supply by limiting the amount of money
banks can lend. InflationThe RBI raises the CRR to reduce the amount of money
banks have to lend, which helps control inflation.
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Credit creation vs credit
control
Both the above concepts are closely related to banking and economics, and
they play a very crucial role in influencing the financial health of an economy
as a whole. Let us understand the differences between them.

The credit creation by central bank refers to the process of creating monetary
flow in the economy through lending whereas the latter refers to the
measures taken by central banks to influence the cost and credit availability.
The former is implemented with the aim of increasing the money creation
and circulation whereas the latter is control inflation, and promote economic
growth and economic stability.
The former is essentially related to the lending and borrowing and the latter
is related to various macroeconomic objective.
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Monetary policy
Monetary policy is a set of tools used to control a country's money
supply, interest rates, and credit availability.
The Reserve Bank of India (RBI) is responsible for India's monetary
policy.
Tools of monetary policy
•Open market operations: The buying and selling of government
securities by the central bank
•Cash reserve ratio (CRR): The percentage of deposits that
commercial banks must keep in reserve
•Repo rate: A key interest rate that the central bank uses to control
the money supply
•Statutory liquidity ratio (SLR): The percentage of deposits that
commercial banks must keep as liquid assets
•Quantitative easing: The buying of financial assets by the central
bank to stimulate economic activity
•Overnight reverse repurchase agreement facility (ON RRP): A
tool used to control short-term interest rates
Types of monetary policy
•Expansionary: Used to stimulate growth and decrease
unemployment
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•Contractionary: Used to control inflation
Employee orientation 8
Monetary policy objectives price stability, employment generation,
Conclusion

Credit is essential for economic growth, but excessive credit


can lead to inflation and financial crises. Commercial banks
create credit, while central banks control it through monetary
policy. Proper credit management ensures stability and
sustainable growth in an economy.
Thank you

7/29/20XX Employee orientation 10

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