How Banks Create Money?
How Banks Create Money? Understanding the Magic of Credit Creation and How You can use it for Your Wealth Creation Ever wondered how the modern banking system never runs out of loans? YES! The modern banking system can multiply an initial deposit of money and create a much larger sum of loans. And it's not magic — it's the credit creation process ! In this blog, I’ll explain this concept in simple terms, help you visualize how it works and how to use it wisely. The Starting Point: An Initial Deposit Imagine you deposit ₹1 crore in your bank account. This money doesn’t just sit idle. Instead, the bank uses a portion of it to give loans to borrowers while keeping a part of it aside as reserves. This process forms the foundation of credit creation. How It Works: When you deposit ₹1 crore in Bank A, the bank must keep a certain percentage as reserves (called the Cash Reserve Ratio or CRR). Let’s assume CRR is 10%. This means: Reserves: ₹10 la...