Introduction:

Commercial banks are monetary institutions that accept deposits from the public, offer all kinds of account services, lends various loans, and provide basic financial assets like certificates of deposit and savings accounts Etc. A balance sheet of commercial banks is the main asset of a bank to generate profit.

Commercial banks play a crucial role in the financial system and economy. They are financial institutions that provide a wide range of financial services to individuals, businesses, and governments. Here’s a detailed look at their meaning and importance :Balance sheet of commercial bank: The process of credit creation begins with banks lending money out of primary deposits to explain the process of credit creation we make the following assumptions.

Balance Sheet of Commercial Banks

1. There are several bank say A,B,C,D Etc.
2. Every bank has to keep 10% of cash reserve
3. A new deposit of rupees 1000 has made by customer in bank A
4. The people have banking habits
5. The loan amount drawn by the customer of first bank is deposited in the full in the second and that of the second Bank in the third bank and so on.

Given these assumption suppose Bank A receive cash deposit of rupees 1000 from a customer. Given the reserve ratio of 10% a bank gives rupees 100 in reserves and lends RS 900 to Mr. X .the balance sheet of a bank A is as follows.

When rupees 900 is lent by bank A to Mr. X who either deposit it with same bank or with the other bank. Suppose the loan of rupees 900 is deposited by Mr X in bank B. Bank B starts with deposit of rupees 900 and keeps 10% of it or rupees 90 as cash reserve and lends rupees 810 to Mr. Y then the balance sheet of the bank B is as follows

This loan of rupees 810 is deposited by Mr. Y in bank C. band C keeps 10% of rupees 81 of rupees 810 as cash reserve and lends RS 729 to Mr. Z then the balance sheet of Bank C is as follows.

Thus the process will continue till the cash deposit of rupees 1000 is completely used. The cash deposit of rupees 1000 led to a loan deposit of rupees 900 + 810 + 729 so on now the total deposit of all the bank share rupees 10,000.

Commercial banks are indispensable to the economy. They not only provide essential financial services to individuals and businesses but also play a significant role in the overall economic development and stability. By intermediating between lenders and borrowers, creating credit, facilitating transactions, providing liquidity, and supporting monetary policy, commercial banks contribute to economic growth and stability.

also read: explain the functions of commercial banks.