What are the limitations of credit creation in an economy?
Dear Student, Commercial banks are power houses of credit. Process of credit creation is initiated by commercial banks which provides finance to all sectors of economy . These banks make loans and advances to their customers . Bank deposits also arises when loans are given . This power of banks to increase deposits through loans , advances etc. is called credit creation .Credit Creation by banks helps to accelerate the economy . Some of the Limitations of Credit creation are:- 1) Cash amount in bank:- When public deposits higher amount, then definitely the higher in credit creation from commercial banks can be seen, but there is a certain limit on cash that can be held by the banks at a time. Only the Central bank can expand or increase this limit by purchasing or selling the securities. 2) Excess Reserve:- This takes place when the country faces recession, at that time the bank finds difficulties in maintaining reserves in place of lending from public, and this will leads to less or decrease in credit creation. 3) Currency Drainage:- This is a situation when the public not deposits the money in the banks, which results in reduction or decrease in Credit Creation in the economy. 4)Borrower availability:- Credit Creation will only flourish if there will be borrowers in the economy, Credit Creation will not be done if there will be no borrowers of money in economy. Regards!