The process of credit creation, is due to lack of cash: The total amount of cash, available to the banking system limits the volume of credit that can be created.... The bank must keep a certain percentage of cash reserve. The total volume of credit cannot ordinarily be larger than the total amount of cash available multiplied by the customary reserve-ratio. And its limitation are as follows.
1. Restriction by central bank- If the banks have large deposits they can create more credit and if they have small deposits then their power of credit creation will be limited.while we know the commercial bank has the monopoly of note issue, if the central bank increase the quantity of money the deposits of commercial bank will increase and they will expand the volume of credit in the enquiry. on the other hand if supply of money decreases, the volume of credit also of decreases any how the credit creation power of the commercial bank is directly affected by the policy of the central bank.
2. The habit of the Customers- The power to create credit by the commercial banks is very much influenced the habits of the people living in that country. If the people are habitual in using the cheques then the volume of credit will expand on the other it will be contracted.
3. The cash Ratio- Every banks keeps an adequate cash reserves for meeting the cash requirements of its customers. The bank will not allow its cash ratio to fall below a certain minimum level. When this level is reached then bank will not advance money.
4. The collateral security Available-The bank advances loan to the borrowers against some kind of collateral security. If these are not available then the power of credit creation will be restricted.
Mabongajoel answered the question on August 17, 2018 at 17:38
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