Académique Documents
Professionnel Documents
Culture Documents
Shetty
Commercial Banks are those profit seeking institutions which accept deposits from general public and advance money to individuals like household, entrepreneurs, businessmen etc. with the prime objective of earning profit in the form of interest, commission etc. Examples of commercial banks ICICI Bank, State Bank of India, Axis Bank, and HDFC Bank
Scheduled banks :- Banks which have been included in the Second Schedule of RBI Act 1934. They are categorized as follows: Public Sector Banks :- E.g.. SBI, PNB, Syndicate Bank, Union Bank of India etc. Private Sector Banks :- E.g.. ICICI Bank, IDBI Bank, HDFC Bank, AXIS Bank etc. Foreign Banks :- E.g.. Citi Bank, Standard Chartered Bank, Bank of Tokyo Ltd. etc. Non scheduled banks :- Banks which are not included in the Second Schedule of RBI Act 1934.
Scheduled Banks
Non-Scheduled Banks
Commercial Banks
Commercial Banks
Foreign Banks
A. 1.
2.
3.
Accepting deposits Demand or current account deposits- a depositor can withdraw it in part or in full at any time he likes without notice. It carries no interest. Fixed deposits- it can be done from 15 days to few years with high rate of interest which can be withdrawn at expiry of term. Saving deposits- it is for the purpose of small saving deposits by salaried people. These deposits carry less rate of interest and money can be withdrawn through cheques.
B. Advancing loans 1. Overdraft facility- this facility is provided to the businessmen only even if the deposits are less, the transaction can be done . Banks charge interest on this facility. 2. Loans by creating deposits- it can be done in following ways Cash credit Demand loans Short term loans
The process of 'Credit Creation' begins with banks lending money out of primary deposits. Primary deposits are those deposits which are deposited in banks. In fact banks cannot lend the entire primary deposits as they are required to maintain a certain proportion of primary deposits in the form of reserves with the RBI under RBI & Banking Regulation Act.
Adjusts assets balance between deposit liability and cash reserves. Cash reserve ratio remains same.
5.50% (w.e.f. 28/01/2012) announced on 24/01/2012 Decreased from 6.00% to 5.50% which was continuing since 24/04/2010
Bank M receives a cash deposit of $2000. This is the cash in hand with the bank which is its assets and this amount is also the liability of the bank by way of deposits it holds. Given the reserve ratio of 10 % the bank holds $200 in reserves and lends $1800 to one of its customers. How is credit created?
The credit expansion in the banking system is influenced by the credit multiplier. The credit multiplier is the reciprocal of the required reserve ratio. Credit multiplier = 1/required reserve ratio If reserve ratio is 10% Then credit multiplier = 1/0.10 = 10
The formula for change in deposits in the banking system is D = (1/r)(E) D represent the change in the banking system as a whole r is the required reserve ratio E is the primary deposit If initial deposit is $2000 and required reserve ratio is 10% then change in deposits in the banking system as whole will be D = (1/0.1)(2000) =20000
The multiple credit creation represented in the progression = $2000 (1 + (9/10) + (9/10)^2 + (9/10)^3 + .+ (9/10)^n) = $2000 (1/(1-9/10)) = $2000 (1/(1/10)) = $2000 x 10 = $20000
Bank m
ASSETS
Reserves $2000
LIABILITIES
Deposits $2000
Reserves Loans
$200 $1800
Deposits
$2000
This variation of $1800 is deposited by the customer in Bank N Bank n ASSETS Reserves $1800 LIABILITIES Deposits $1800
Reserves
$180
Deposits
$1800
Loans
$1620
Bank o
ASSETS
Reserves $1620
LIABILITIES
Deposits $1620
Reserves Loans
$162 $1458
Deposits
$1458
This procedure goes on to other banks. Each bank in the sequence gets surplus reserves, lends and creates new demand deposits equal to 90 % of the prior bank.
Bank
M N O All other Banks Total for the Banking System
Required Reserves
$200 $180 $162 $1458
New Loans
$1800 $1620 $1458 $13122
New Deposits
$2000 $1800 $1620 $14580
$2000
$18000
$20000
1.Cash Drain 2.Transfer of deposit to non bank financial 3.Willingness to borrow 4.Different types of loan.
The multiple deposit creation model seems to indicate that the central bank of the country has complete control over the level of current deposits by setting the required reserve ratio. The fact is that all the four players i.e the central bank, commercial banks, depositors and borrowers are important in the determination of credit expansion.
THANK YOU