Solution
Option 1 -> Fractional reserve banking is the system that enables money creation, but not the process itself.
Option 2 -> Credit creation is the actual process where banks create money by issuing loans and creating deposits.
Option 3 -> Monetary policy is a central bank tool to control money supply, not a bank's money creation process.
Option 4 -> Reserve Management involves managing bank reserves, not creating money.
Hence, Option 2: Credit creation -> When banks provide loans, they don't simply lend out existing deposits. Instead, they create new money by crediting the borrower's account with a deposit. This newly created deposit becomes part of the money supply. For example, when a bank grants a ₹100,000 loan, it creates a new deposit of ₹100,000 in the borrower's account through a simple accounting entry. This process of lending and deposit creation is called credit creation, and it's the fundamental mechanism through which commercial banks multiply the money supply in an economy beyond the base money created by the central bank. -> correct