The credit creation by commercial banks is determined by amount of initial deposit and the legal reserve ratio. Suppose customer deposits ₹ 1,000 in bank. Bank has to pay interest on this amount for which bank should lend this money to someone. A part of the amount is to be retained with bank to meet its customer’s obligations. Say, if LRR is 20%, the banks will keep 20% of deposits as reserves and will lend remaining 80% i.e., ₹ 800. Those who borrow will spend this money and same ₹ 800 will come back to banks in form of deposits. This raises the total deposits to ₹ 1,800 now. Banks again keep 20% of 800 as reserve and lend ₹ 640 to those who needs. This will further raise the deposits with banks. In this way deposits will go on increasing @ 80% of the last deposit. The number of times the total deposit will become, is determined by money multiplier i.e., 1/LRR = 1/0.2 = 5 times. 

Total deposits will be Initial Deposits x Money Multiplier = ₹ 1,00 x 5 = ₹ 5,000.