Yes, I agree with this statement:
Reasons:
The main source of
funds, which is available to commercial banks, is in the form of deposits from
the public.
Primary Deposits :
(i) Primary deposits
are also known as cash deposits. Such deposits refer to money deposited by the
people in the form of cash with the banks. These deposits are withdrawable by
the depositors.
(ii) A part of these
deposits are kept by the bank, to meet the demand for cash of the depositor.
This is termed as minimum cash reserves. The banks are able to do with a very
small reserve because all depositors do not withdraw money at the same time
(iii) When a bank
grants loan to a borrower, the bank opens a deposit account in the name of the
borrower and the money transferred on the account of the borrower creates
secondary deposits.
(iv) When the
borrower withdraws money from his loan account by a cheque, it is deposited by
the payee in some other bank. Other banks again create credit on the basis of
fresh deposits received after keeping the required reserves.
Thus, a commercial
bank can create credit on the basis of primacy deposits.
