Question

Q1) Commercial banks multiply (create) money while the central bank of India (RBI) regulates it. Explain in detail with example?

Answer 1

There are many commercial banks in India like punjab national bank,bank of baroda,state bank of india etc which are regulated by the Reserve Bank of India.

When the customer of the commercial banks deposits the money in his or her account for a specific period of time then bank provide some interest to the customer and that deposit money is lend to the borrower by the commercial bank and charge the interest which should be more than the bank give interest to the depositors.

By providing the loan to the borrower and charge interest the commercial bank create money.

Now they are regulated by the Reserve Bank of India ,as the RBI guidelines clearly mentione that commercial banks must be kept some amount of cash near about 26% which can not be lend is called the reserve ratio.

RBI protect the interest of the depositors and maintain the safety and soundness of the banking and financial system of the country.