The deposits created from different underlying transactions of the bank are called derivative deposits. The prime underlying transaction includes granting credit to clients in various forms. Therefore the banks in the process of granting credit create derivative deposits. The loans are sanctioned and credited to the accounts of borrowers to create new deposits. Thus, it is true to say that “deposits create loans and loans create derivative deposits.”
This type of deposit is “a bank deposit consisting of the proceeds of a loan credited to the depositor's account.”
The balance in excess of the minimum cash reserves that is utilized by the banks to generate credit by means of granting loans is called derivative or secondary deposit. In other words, what remains after cash reserves are deducted from primary deposits is the derivative or secondary deposit.
Banks grant advances and loans and rather offering cash to the receivers or borrowers, open deposit accounts in their names. These are the derivative or secondary deposits. A borrower withdraws money from the account with checks. Each loan generates a deposit. The generation of a secondary deposit means the generation of credit.
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