What is credit creation? - Vidyadip

Question

What is credit creation?

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Answer

It refers to the creation of demand deposits with the commercial banks on the basis of their cash reserves. Often the deposits are created many times more than the cash reserves. This is based on the historical experience of the banks that cash withdrawal of funds is only a small percentage of the total demand deposits.e.g. if against the cash reserves of ₹ 100, demand deposit of ₹ 1,000 is created, it is called credit creation by a multiple of 10 or 10 is treated as credit multiplier which is equal to $\frac{1}{\text{LRR}}.$

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