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Why does redepositing of loan amounts help in credit creation?

hard Q9 of 15
Banking Awareness - Basics Of Banking & Banking Terminology
Why does redepositing of loan amounts help in credit creation?
AIt increases cash with RBI
BIt allows repeated lending cycles
CIt eliminates reserve requirements
DIt reduces deposits
Step-by-Step Solution

  1. Step 1: Identify redeposit effect

    Loans become deposits in another bank.

  2. Step 2: Link with credit cycle

    Redeposits allow banks to lend again.

  3. Final Answer:

    It allows repeated lending cycles → Option B

  4. Quick Check:

    Redeploying deposits multiplies credit ✅
Quick Trick: Redeposit = new base for lending.
Common Mistakes:
  • Thinking redeposits stop lending.
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