What are the limitations of credit creation?
blogspot.com//search?q=commercial-banks-definitions-primary">Commercial Banks though convey the ability to practise credit, their powers are non unlimited. Certain points touching on the procedure of credit creation. They are termed equally limitations to credit creation past times commercial banks.
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The limitations of credit creation past times commercial banks are equally follows :-
1. Amount of Deposit
The nearly of import component division which decides credit creation is the total of deposits made past times the depositors. Higher is the total of deposits, greater is the provide of credit as well as vice versa.
2. Cash Reserve Ratio (CRR)
There exists an indirect human relationship betwixt Credit Creation as well as Cash Reserve Ratio (CRR). Higher is the Cash Reserve Ratio (CRR) to a greater extent than volition locomote the reserves to locomote maintained as well as less credit volition locomote created past times banks. The CRR is fixed past times the RBI inward India. It ranges betwixt 3% to 15%.
3. Banking Habits of People
If the banking habits of the people are well-developed, as well as so all their transactions would locomote through banks, as well as this volition atomic number 82 to expansion of credit as well as vice-versa.
4. Supply of Securities
Loans are sanctioned on the solid soil of the securities provided to the banks. If securities are available as well as so the credit creation volition locomote to a greater extent than as well as vice-versa.
5. Willingness of people to borrow
Commercial banks may convey plenty coin to lend. Customers should locomote willing to borrow from the banks to facilitate credit creation. If they are willing to borrow, as well as so the credit created past times banks volition locomote less.
6. Monetary Policy of Central Bank
While credit is created past times commercial banks, it is controlled past times the Central Bank. Credit command is i of import business office of the key bank. Central Bank uses diverse methods of Credit Control from fourth dimension to fourth dimension as well as so influences the banks to expand or contract credit.
7. External Drain
External Drain refers to withdrawal of cash from the banking organization past times the public. It lowers the reserves of the banks as well as limits the credit creation.
8. Uniform Policy
If all the commercial banks follow a uniform policy related to CRR, as well as so credit creation would locomote smooth. If roughly banks follow liberal as well as others follow a conservative one, as well as so credit creation would locomote affected.
