Economy Simplified: Money Creation by Banking System explained.

What are assets?

1. Assets are things a firm owns or what a firm can claim from others. In the case of a bank, apart from buildings, furniture, etc, its assets are loans given to the public. When the bank gives out a loan of Rs 100 to a person, this is the bank’s claim on that person for Rs 100. Another asset that a bank has is reserves. 
2. Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash. These reserves are kept partly as cash and partly in the form of financial instruments (bonds and treasury bills) issued by the RBI.
3. Reserves are similar to deposits we keep with banks. We keep deposits and these deposits are our assets, they can be withdrawn by us. Similarly, commercial banks like State Bank of India (SBI) keep their deposits with RBI and these are called Reserves.
Assets = Reserves + Loans

What are liabilities?

Liabilities for any firm are its debts or what it owes to others. For a bank, the main liability is the deposits which people keep with it. 
Liabilities = Deposits

What do you mean by Net Worth?

The accounting rule states that both sides of the account must balance. Hence

if assets are greater than liabilities, they are recorded on the right hand side as Net Worth.
Net Worth = Assets – Liabilities

If we assume that there is no currency in circulation, then the total money supply in the economy will be equal to Rs 100.

M1= Currency + Deposits = 0 +100 =100

Assets and Liabilities of RBI

1. Foreign currency assets
2. Bill purchases and discounts
3. Collaterals by commercial banks

4. Loan and advances
5. Rupee securities
6. Gold coin bullion
1. Currency held by Public Vault cash held by commercial banks
2. Government securities

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