Creation of Money By Commercial Banks:

Creation of money by commercial banks reflects the view that by granting loans, and advances, an initial deposit with a commercial bank can yield a greater cumulative demand deposits in the entire commercial banking system. When a commercial bank advances a loan, it opens an account in the name of the customer creating a claim against itself and in favour of the customer (borrower). Note that the loan is made, not by physically handing over claims, but by creating a book keeping entry. The same procedure is followed by other banks - each keeping small cash in reverse and lending the remaining amount. The entire commercial banking system thus creates demand deposit money and the economy is reflated.