Commercial banks play a very important role in the process of credit creation. Banks use a major portion of their deposits for further credit creation. The process of credit creation begins with banks’ lending money out of deposits that are accepted from the people. But banks cannot lend the entire deposits as they are required to maintain a certain proportion of primary deposits in the form of reserves with the RBI under RBI & Banking Regulation Act. That reserve which is maintained with RBI is known as cash reserve ratio. After maintaining the required reserves, the bank can lend the remaining portion of deposits.
