Fractional Reserve Banking in India

In India, reserve bank controls the flow of money in economy. It also protects the fund of depositors. So, it fixes the reserves ratio which every bank has to keep in cash form out of total funds deposited. So, fractional reserve banking is just part of total deposit of customer of bank which will be in liquid form. Rest of deposited money is used by bank for issuing different loans. Main aim of fractional reserve is to available cash for depositors. Sometime, depositors may need money. At that time, bank can easily return him his money without any delay.

Fractional Reserve Banking System in India

In India, bank has to calculate some reserve out total deposited money. Suppose, it is 10%. Suppose one person deposit Rs. 100. At that time, bank keeps cash as reserve Rs. 10 and issue Rs. 90 to A party. But A party will not withdraw the money at the same time. Bank keeps its 10% as reserve and gives loan to B party. It means, bank reserves Rs. 9 and give loan of Rs. 81. B also did not withdraw the money. At that time, bank keeps its 10% reserve and gives loan to C party. Like this whole fractional reserve banking system works.


From above chart, we can understand the system of fractional reserve banking system in India. We are seeing that there is no new money is being created but new deposit money is being created through loans. Up to reaching Rs. 72.90 loan to C, bank XYZ has increased his deposited money of Rs. 100 up to Rs. 243.90. I have just showed the detail of one customer. If there are 100,000 customer of a bank, you can see big number of deposit  after its multiplication.

Risk under Fractional Reserve Banking 

In fractional reserve banking, bank can only face risk of liquidity, if depositor withdraw the money from bank's estimated reserve. Due to this, central bank estimates reserve ratio more scientifically for protecting the interest of depositors of bank.

Criticism of fractional-reserve banking

In this system, we are seeing, if new person gets loan at that time, bank's deposit will increase and he gets more power to give debt to other. Suppose, if there is no more person who is interested to get loan at that time, bank's movement will slow. It means, money supply depends only on the persons who are interested to get loan. But, it is my personal thought, it is not strong system. In my life, I did not take Rs. 1 loan from any bank. If 10% will increase people like me, it may be risky for the life of banks. Because, banks are playing game through fractional reserve which emphasizes to become debtor. All the advertisements promote to take loan. But for me becoming debtor as becoming dead body. As per my theory, bank should stop fractional reserve banking system. It should work as security guard of our money. Bank should take interest for deposit our money as security guard. At that time, bank's employees will not leave their work and same time, bank will stop to pay expenses for advertisement of loan. When loan will stop, every person will do new project with their hard earned money which he got from labour and then he will use this money as capital. At that time, balance will be in the economy. 


Related : Balance Sheet of A Bank 

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Accounting Education: Fractional Reserve Banking in India
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