Question

Provide in each case a brief explanation articulating why the statement may be true, false or even uncertain.

As commercial banks create money through their lending behaviour, there is no limit in practice on how much money they can create. (Word limit 300)

Answer 1

As commercial banks create money through their lending behaviour, there is no limit in practice on how much money they can create. The given statement is False.

Explanation : The Commercial Bank borrows deposits money from the general public and pays them the interest on that deposit. The main earning source of Commercial Bank is to lend that money to the borrowers in the form of loan and charge the higher interest rate than they pay to the depositors. But there's always a limit upon the Commercial Bank to lend the money. Commercial Bank cannot lend 100% of the deposit amount.

The RBI keeps a check on the activities of Commercial Bank. It is mandatory for the Commercial Bank to keep certain potion of deposits in the form of SLR and CRR i.e Statutory Liquidity Ratio and Cash Reserve Ratio. It is around 20% of the total deposit amount. This amount is kept by the Banks in order to meet the immediate demands of the depositors withdrawal. Being RBI as an apex body of all the Commercial Banks,the RBI makes sure that Commercial Bank should not only provide loans to big firms but also to the small and medium firms. Also RBI acts as a facilitator to the Commercial Bank for lending activities.

The amount of money created in the economy depends upon the Monetary Policies set by the Government,i.e RBI chooses the amount of reserves that Bank has to keep with them. Lending amount is also restricted because bank has to take many steps to reduce the risk associated with creatring more loans.

So this means that it is not true to quote that there is no limit in practice on how much money they can create.