What Is Credit Creation?

One of the important functions of commercial bank is the creation of credit. Credit creation is the multiple expansions of banks demand deposits. It is an open secret now that banks advance a major portion of their deposits to the borrowers and keep smaller parts of deposits to the customers on demand. Even then the customers of the banks have full confidence that the depositor's lying in the banks are quite safe and can be withdrawn on demand. The banks exploit this trust of their clients and expand loans by much more time than the amount of demand deposits possessed by them. This tendency on the part of the commercial banks to expand their demand deposits as a multiple of their excess cash reserve is called creation of credit.
The single bank cannot create credit. It is the banking system as a whole which can expand loans by many times of its excess cash reserves. Further, when a loan is advanced to an individuals or a business concern, it is not given in cash. The bank opens a deposit account in the name of the borrower and allows him to draw upon the bank as and when required. The loan advanced becomes the gain of deposit by some other bank. Loans thus make deposits and deposits make loans.

Credit Creation is Most Important Function of Commercial Bank, Like Other Financial Institute Bank aim to Earn Profit by Make Advance to Other. Therefore, Some Time Bank Is Called a Factory of Credit Creation. Everyone Know that People Cannot Withdrawal Money in simultaneous, Some With drawl While Other deposit at Same Time. So Bank Encourage Credit Creation By Given Advance to other, Keep Small Cash in Reserve se for day to day Tran sanction.
Example:
Person A Deposit in Bank Rs 10000, and Cash Reserve Ration is 10%.
Than Bank Only Keep 10% in His Account, Give 90 of Rs 10000 Amount to other By Loan Or Anything... To Person B, While Person B Deposit This Amount in His Bank, 9000, Again His Bank Keep Only 10% Reserve, And Give Remain to Person C, While This Process Will Be Cont.. Until The Credit Creation is Equal to 10000.
Person          Amount         cash Reserve (10%)    Credit Creation
A                     10000           1000                                9000
B                      9000              900                                8100
C                      8100              810                       


So On....