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Arrange the following steps involved in the process of credit creation by Commercial Banks.

(A) The commercial bank lends the excess reserves to the borrowers.

(B) The borrowers deposit the loaned money in the bank.

(C) The bank keeps a portion of the lent deposit money as reserve.

(D) The initial deposit is made in the commercial bank.

Choose the correct answer from the options given below:

Solution

✅ Correct Option: 3

The correct order is D, C, A, B:

(D) The initial deposit is made in the commercial bank.

(C) The bank keeps a portion of the deposit as reserve (as per the required reserve ratio).

(A) The bank lends out the remaining excess reserves to borrowers.

(B) The borrowers deposit this loaned money back into the banking system.

This last deposit then becomes a fresh deposit for some bank, and the cycle repeats, leading to the process of credit (money) creation through the banking system, where total credit created is a multiple of the initial deposit (determined by the reserve ratio).

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