Banking & Money Creation – An Explainer
( The following article appeared in CNBC TV18 on January 28, 2020, per the link below: https://www.cnbctv18.com/views/how-the-banking-system-works-and-money-is-created-an-explainer-5143971.htm ) Banking & Money Creation – An Explainer Here are some basic questions that take us deep into the fascinating world of banking and money. Why don’t banks lend out the current “banking liquidity surpluses” to clients, rather than dumping them with the RBI? Before June 2019, banks were running “liquidity deficits”. Why didn’t banks then raise client deposits to fund the deficits, rather than constantly borrowing from the RBI? Are our banks lazy, preferring to deal with the RBI rather than do business with their clients? Let’s try and address these and other related questions in this explainer. Balance sheet of Indian banking system To start with, consider Table 1, an admittedly simplistic snapshot of the balance sheet of the total Indian banking system, at the s