THE WINNERS ACADEMY

ECONOMICS

COMMERCIAL BANK

5. COMMERCIAL BANK
Marks : 06

Marks with option : 10

Points to be Learn :
Meaning and Definition of Commercial Bank
Functions of Commercial Bank
Process of Multiple Credit Creation

Introduction : What is Bank?

A bank is a financial institution deals with deposits and advances & other related services. It
receives money from those who want to save in the form of deposits. It lends same amount
to needy people for productive purposes. Banking system is important for the functioning
of the economy.
The Indian banking regulation Act 1949 defines Banking company ..........
As a company which transacts the business of Banking in India.
The word Banking has been defined as [Section 5(1) (b)].........
Accepting for the purpose of lending or investments, of deposits of money
from the public repayable on demand or otherwise and withdrawable by
cheque, draft, order or otherwise.
Following are the features of Bank :
1) Financial Institution :
It is a financial Institution which deals with money & other related services.
2) Accepting Deposits :
Bank accepts deposits from public. These deposits can be withdrawn either on
demand or after a certain period.
3) Lending of Money :
Deposits are given by bank to needy people in form of loans. Bank give short term,
Medium term and Long Term loans.
4) Important Role :
Bank plays an important role in modern business. Without banks, it would be highly
difficult to conduct business activities in smooth manner. It is an aid-to-trade.
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5) Bank Money :
Bank operates mostly with cash & Bank money such as cheque, Drafts, Debit Cards
etc.
6) Services to Customers :
Bank provides number of services to its customers. It includes Individuals and
organizations or institutions etc. It makes direct payments & receives income on behalf of
its customers.
7) Functions :
Bank performs various functions for and on behalf of its customers. It includes
banking functions like accepting deposits and Granting loans & advances; also some
secondary functions which consists various agency functions and general utility
functions.
All above are different features of a commercial bank.

Q.2

What is a Commercial Bank? What are its primary Functions?

Answer :

A commercial bank is a profit seeking organisation dealing in money. It is a

nancial institution dealing with other peoples money. It accepts deposits from public &
provides leans & advances.
It charges higher rate of interest for the loans sanctioned & offer lower rate of interest on
deposits accepted. The difference between these two is the profit earned by commercial
bank.
Commercial bank differs from other financial institutions. Financial institutions serve as a
link between the lender and borrower of funds, while accepting deposits & lending loans,
commercial bank create credit. Credit creation is the most special feature of commercial
banks.
Banks perform a number of vital functions. The functions of a bank can be broadly
classified into two groups.
A) Primary Functions :
1. Accepting deposits.
2. Granting advances.
B) Secondary Functions :
1. Agency functions.
2. Utility functions.

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A) Primary Functions :
They are also called as banking functions. These functions are performed by every bank.
The primary functions are as follows.
1. Accepting Deposits :
The bank accepts deposits from public by different ways.
Demand deposits :
Demand deposits are such deposits which can be withdrawn by customers on demand.
A. Saving deposits.
B. Current deposits.
Time deposits :
Time deposits are made by customers for certain period. During this period money
cannot be withdrawn. Since money is deposited for fixed period the bank gives it as a
loan to others. On these loan banks earn interest. As a result, bank can pay higher
rate of interest on these deposits.
C. Fixed deposits.
D. Recurring deposits.
A) Saving Deposits :
It is a bank account opened by persons to save part of their income. It is suitable to
salaried people. People are free to deposit their savings. Certain restrictions are imposed
on withdrawals. A nominal rate of interest is provided for such deposits. Bank provides
passbook, cheque book & pay in slip book. Saving account can be operated with lesser
amount.
B) Current Deposits :
It is kind of demand deposits. It can be withdrawn at any time. It is suitable to
businessman. There are no restrictions on the amount of deposits or withdrawals. No
interest is provided for such deposits. Bank charge certain commission for providing
facility. The main purpose of current deposits is to settle business transactions.
C) Fixed Deposits :
When deposits are made for a fixed period of time, they are called as Fixed Deposits.
The amount can be withdrawn only after the maturity period. The rate of interest depends
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upon time of deposits. The main purpose of this is to get lumpsum amount on the maturity
of its deposit. Higher rate of interest is paid on fixed deposit. Bank issues fixed deposit
receipt on acceptance of deposit.
D) Recurring Deposits :
Under this type, customers deposit a fixed amount at regular intervals. Withdrawal
can made only at the expiry of period. Bank pays interest at a higher rate than on saving
deposits. Such deposits encourage small savings.
2. Granting Loans & Advances :
Various types of loans and advances are provided by commercial banks. It provides
loans to individuals & institutions. Bank charges interest money lent.
i.

Overdraft : It is a facility provided to current account holders only. Under overdraft

facility, the account holders are allowed to withdraw more than the balance in their
account. Interest is charges only on the excess amount withdrawn. It is provided for
very short period say 3 to 6 months. Banks does not open separate account for
overdraft amount. Bank may not ask for security in certain cases when the overdraft
amount is less. Higher rate of interest is charged on overdrawn amount.

ii.

Cash Credit :

Cash credit is given to customers on the basis of security

surrendered. Under this, the advance is given for longer period of time and large
amount is sanctioned than that of overdraft. A separate loan account is opened.
Amount of loan is deposited into this account by bank. Then the account holder
(Borrower) is allowed to withdraw the amount from this loan account by cheque.
Interest is charged only on actual amount withdrawn or used.
iii.

Discounting of Bill of Exchange :

The bank can advance money by purchasing

or discounting bill of exchange. Bank pays the bill amount to drawer of the bill by
deducting discounting charges. On maturity, bank collects full amount of bill from
drawee.
iv.

Loans :

Bank lends money to needy people by way of loans. Loans are given for

short term period, Medium term period and Long term period. Interest is charged on
actual amount of loan sanctioned. rate of Interest is depend upon the amount of loan
and period of Loan.
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a) Call Loans / Money at Call :

COMMERCIAL BANK

Loans provided by commercial banks for a

period of 7 to 15 days are known as Call Loans. These loans are taken by bill
brokers or stock brokers. The rate of interest is the lowest. These loans can be
called back any time by the commercial banks from the borrowers.
b) Short Term Loans :

Short-term loans are provided by commercial

banks for the period of not more than two years. The rate of interest is higher
than call loans and lower than medium term loans. It is required by
manufacturers and producers In order to fulfill their working capital
requirements.
c) Medium Term Loans :

Medium-term loans are provided by commercial

banks for the period of 2-5 years. The rate of interest is higher than short term
loans and lower than long term loans.
d) Long Term Loans :

Long-term loans are provided by commercial

banks for the period of more than Five years. The rate of interest is higher
than other types of term loans. It is required by manufacturers and producers
for making permanent changes in business or capital expenditure
requirements.

Q.3

What are the secondary Functions of commercial banks?

Answer :

Apart from two primary functions modern commercial bank has expanded its

scope to attract more business. Bank performs a number of secondary functions. They are
also Called as Non-banking functions. The important secondary functions are as follows :
A. Agency Functions
B. General Utility Functions
A. Agency Functions :

While performing these functions bank acts as an agent of its

customers & perform number of functions for and on behalf of its customers.
1. Transfer of Funds :

Banks transfers funds from one branch to another or from

one place to another. It is transferred with the help of Demand Draft (DD), mail
transfers etc.
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2. Collection of Money :

COMMERCIAL BANK

Bank collect the money of cheque through clearing section.

Bank also collect income & credit the account of customers by that amount.
3. Periodic Payments :

According to standing instruction bank make payment in

respect of rent, electricity bill, telephone bill etc. Bank act as an agent of its customer
& make all payment on his behalf. After payment bank debit the account of customer.
4. Portfolio Management :

Bank undertake to purchase & sell the shares &

debentures on behalf of its clients & accordingly debit or credit the account. Since
banks are better informed about the market conditions, they buy & sell securities at
most favourable terms.
5. Acting as Trustee, Executor, Administrator or Attorney :

As a trustee, the

bank is the custodian/executor of the customers will, in case of death. As an attorney,

the bank signs the documents on behalf of the customer's. Commission is generally
charged for such services.
6. E-Banking (Electronic Banking) :

Through electronic banking, the customers

can operate his bank account electronically. It includes Net-banking, Card system,
Phone banking, Mobile banking etc.
7. Dematerialization Account (D-mat account):

Some commercial banks provide

D-mat account facility to their customers. D-mat account is useful to investors who
deal in shares and debentures. The transactions relating to the buying and selling of
shares are recorded in D-mat account.
B. General Utility Functions :
1. Issue of drafts, letter of credit etc.: Bank issue draft for transferring money from
one place to another. It issues letter of credit in import trade. To assure exporter of
his payment bank issues letter of credit.
2. Locker facility :

Bank provide locker facility for the safe custody of valuable

documents. For this purpose banks have strong rooms with safe deposit lockers.
Bank charge an annual rent for lockers.
3. Dealing in Foreign Exchange :

Reserve

Bank

of

India

has

allowed

commercial banks to deal in foreign exchange. Bank undertakes the business of

financing the external trade. They also do the function of changing the currency of
one country in the currency of another country.

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4. Underwriting of shares :

COMMERCIAL BANK

Bank act as a underwriter for issue of shares &

debentures of joint stock companies. By underwriting, the underwriter takes the

responsibility of purchasing shares which are not purchased by public.
5. Travellers cheque :

Bank issue travelers cheques to travelers. It is risky for a

traveller to carry large amount of cash with him when he travels. To avoid such risk
of loss & inconvenience of carrying large amount of cash, travellers cheques are
issued.
6. Letter of credit : The commercial banks issue letters of credit to enable the traders
to buy goods on credit. A letter of credit is a document or order by a banker in one
place, authorizing some other banker in some other place, too honour the drafts or
cheques of the person whose name appears in the document.
7. Reference / Status Report :

The commercial bank also gives confidential reports

on third party about its financial standing, mode of banking and frequency of
payments etc.
8. ATM, Debit Card, Credit Card : Almost all banks have now started to issue
ATM/Debit Cards. Customers can make purchase or withdraw money using
ATM/Debit Crads. The amount is directly debited (i.e. Reduced) from the bank
account. Some banks have also issuing credit cards to its customers.
9. Compilation of statistics / Publishing information :

Some

banks,

publish

business and financial information relating to trade, commerce and industry. Some
bank also publishes bulletins or journals on research, on economic and commercial
matters.
All above are the different secondary functions of a commercial bank.

Q.4

Explain the process of multiple credit creation by commercial banks.

Answer :

Credit creation is one of the important functions of a commercial bank.

Commercial banks are said to be the manufacturers of money. They accept deposits &
create loans out of every deposit accepted.
Commercial bank accepts deposits from public in terms of cash or cheque. They are
called as 'Primary Deposits'. These deposits are not kept idle by banks. They have to keep a
certain amount to meet the demand of the customers. This is called as 'Cash Reserve Ratio.'
The rate of C.R.R. is decided by Reserve bank of India.
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Through experience commercial bank know that all depositors will not withdraw
their deposits at one time. Hence, commercial bank keep aside certain part of deposits &
rest of the deposit's are for giving loans & advances to needy people. So with every deposit,
there is a scope for credit creation. Hence, it is said that "Every deposit creates a Loan."
Commercial bank sanctions loans & advances on the basis of securities submitted by
customers. Loan amount is not given in terms of cash. Instead of that, an account is opened
in the name of Borrower (i.e. the person who takes loan) & loan amount is credited to his
account. Thus, Every loan creates deposit. The loan amount can be withdrawn by means
of cheques. Such deposit created by commercial bank is called as "Derivative deposits."
Customers use these loans to make payments, while making payments they issue
cheque. The person who receive cheque, deposits it in another bank. For that bank, it will be
the primary deposit. A part of the deposits will be kept as a reserve by that bank &
remaining amount will be used for providing loans & advances.
This process is repeated by other banks & all the banks. This process involving all the
banks is called 'Multiple credit creation.' A single bank cannot create credit. The entire
banking system can create huge amount of credit which is more than actual deposit.
It can be summarized as under,
Bank

Primary

Cash Reserves

Derivative

Loan given

Deposit

(@10%)

deposit

ABC Bank Ltd.

Rs.1000/-

Rs.100/-

Rs.900/-

Rs.900/-

XYZ Bank Ltd.

Rs.900/-

Rs.90/-

Rs.810/-

Rs.810/-

PQR Bank Ltd.

Rs.810/-

Rs.81/-

Rs.729/-

Rs.729/-

----

----

----

----

----

----

----

----

----

----

Continues...... Continues......

Continues......

Continues......

Continues......

Q.5 What are the limitations of multiple credit creation?

Answer :

Credit creation is an important function of commercial banks. But commercial

banks cannot create unlimited credit. Following are the certain factors affect the process of
credit creation. They are termed as limitations.
a) Primary Deposits :

The amount of primary deposit is the basis of credit creation

activity. Higher the amount of deposits, greater would be the supply of credit & vice versa.
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b)

Cash Reserve Ratio :

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COMMERCIAL BANK

There is an inverse relationship in between C.R.R. & credit

creation. The C.R.R. is fixed by R.B.I. in India. Higher the cash reserve ratio, more will be the
reserves to be maintained and less would be credit created by banks.
c)

Banking Habits : If the banking habits of people are well developed then all their

transactions would be through banks & this will lead to expansion of credit.
d)

Liquidity Preference of the people : The desires of public to hold cash in hand

than to deposit in bank is called as liquidity preference. If liquidity preference is high then
credit creation will be less.
e)

Willingness of people to borrow

Commercial banks may have enough

money to lend. Customers should be willing to borrow from the banks to expand credit
creation. If business conditions are good then demand for credit would be high & vice versa.
f)

Availability of Securities

Loans are sanctioned on the basis of securities

provided to the banks. If enough securities are available then credit creation will be more &
vice versa.
g)

Credit Control Policy of Central Bank

While

credit

is

created

by

commercial banks it is controlled by the central bank. IT uses Quantitative & Qualitative
measures to control credit.
All above are the limitations of multiple credit creation.

DEFINE THE TERM

1. Fixed deposits / Time deposits :
It is one of the way by which commercial bank accepts from public. When fixed
amount is deposited at once for fixed period then such deposits made are called as
fixed deposits. Such deposits are accepted for a longer period. Varies from 15 days to
few years. These deposits cannot be withdrawn before the expiry of period. If they are
withdrawn, there is a loss of interest.
Bank pays very higher rate of interest. It depends upon the time or period of
deposits. IT is a good source of investment for those who have excess money.
Against deposit, Loan can be taken from commercial bank.
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Features:a.
b.
c.
d.

Higher rate of interest is paid.

Fixed deposit amount is available for giving long term loans.
Surplus money with people is invested in this account.
Loan can be granted against fixed deposit.

2. Cash Credit :
This type of loan is very popular with Indian businessmen. In this arrangement
bank gives loans to the borrowers against some security. Bank open loan A/c on the
name of loan taker & entire loan amount is credited to his loan A/c. Then loan taker is
allowed to withdrawn the amount from time to time. Bank charges interest only on the
amount withdrawn from the bank.
3. Safe Deposit Vault :
Safe deposit vault facility is available to the general public to enable them to keep
their valuables, such as shares, gold, silver ornaments etc. There is a separate in the
bank, where
Lockers are provided in various sizes. Bank charge an annual fees for providing this
service. It is called Locker Rent.
4. Discounting of bill of Exchange :
A bill of exchange is an instrument in writing used to settle the trade transaction. It
is a written promise to pay certain sum of money. It is drawn by creditor on debtor. IT
is payable after certain period of time.
If creditor wants the money, he can present this bill of exchange to the bank for
discounting.
After deducting discount, bank pays balance amount to the holder of bill. On due
date, drawee make full payment to bank. If bill of exchange dishonored then creditor
make payment to bank.
In shorts discounting of bills of exchange means advancing short term loans
against a promise of repayment in future.
5. Travellers Cheque :
It is risky for a traveller to carry large amount of cash with him when he travels. It
is inconvenient also. To avoid such risk of loss, the commercial banks issued travellers
cheques.

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These cheques are issued in suitable denominations such as Rs. 25, Rs. 50, Rs. 100.
They be encashed at the branches of the issuing bank or at the places mentioned
therein.
6. Current deposits / Demand deposits :
They are also called as Demand deposits. It is suitable to businessmen. Current A/c
holder can deposit money for any number of times & can withdraw it for any number
of times.
Bank does not pay any interest on current deposits. Overdraft facility is allowed to
current A/c than balance in account.
Features:a.
b.
c.
d.

It can be opened by business community only.

No interest is provided on current account deposits.
Overdraft facility is granted.
There is no limit on number of withdrawals from account.

7. Saving deposit :
These savings accounts are opened by salaried people. Saving accounts can be
opened with a small amount. There is no limit on amount of deposits & number of
deposits. There is a limit on number of withdrawals. The main aim of saving account is
to promote saving habit among people.
Bank pays very lower rate of interest. Cheque book facility is provided to
withdraw amount from deposits.
Features:
a.
b.
c.
d.

It promote saving habits among people.

Saving deposit amount is not available for giving long term loans.
There is a limit on number of withdrawals.
It can be opened by any person.

8. Recurring deposit
Under this type, customers deposit a fixed amount at regular intervals. Withdrawal
can be made only at the expiry of period. Bank pays interest at a higher rate than on
saving deposits. Such deposits encourage small savings.
Features:a. It promotes regular saving habits among people.
b. Small regular savings are useful to people to realise their big dreams.
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c. Any person can open recurring deposit account.

d. Loan facility is available against accumulated deposits in recurring account.
9. Commercial Bank :
Commercial bank is a profit making institution. It accepts from deposits from
public at lower rate of interest. Same money is utilized by commercial bank for giving
loans & advances. On loans, commercial bank charge higher rate of interest. Out of
interest received, it pay interest on deposits. Difference in between interest received &
interest paid is called as Profit of commercial bank.
It acts as intermediary in between depositor & loan taker. Commercial banks deals
with other people money. Credit creation is an important feature of commercial bank.
Features:
a. It accepts deposits through saving, current, fixed deposits & recurring deposits.
b. It lends money through overdraft, cash credit, Discounting of bill & term loans.
c. It is profit oriented institution.
d. Credit creation is an important function of commercial bank.
e. Commercial banks work under the instructions, guidelines & control of central Bank.
f. Commercial bank performs number of secondary functions.
10. Overdraft :
Overdraft facility is generally given to current account holders. In case of overdraft
facility, the account holder is allowed to withdraw more amount than balance in his
account. The bank specifies maximum limit of overdraft amount. Bank sanctions
overdraft facility against the security of some financial assets such as shares,
debentures, insurance policies etc. It is short term funds provided to businessmen.
Bank charges very higher rate of interest on overdrawn amount. There is no need to
open loan account separately.
Features:
a. It is granted to current account holders.
b. It is short term credit.
c. Higher rate of interest is charged.
d. There is no need to open loan account separately.

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11. Credit creation :

Commercial bank is a financial institution called as Manufacturers of money.
The accept deposits from public by various ways. Such deposits called as Primary
Deposit. Out of every primary deposit bank keep certain part of money with it &
remaining money is utilized for giving loans & advances.
While advancing loans bank open Loan A/c on the name of loan taker. Loan
amount sanctioned is directly credited to loan A/c. Such deposit account created by
advancing loans is called as Derivative Deposits. So it is rightly said that Every
Deposit create loan &Every loan create Deposit.
Loan taker deposits the amount with other bank. So for other bank it will be
considered as Primary Deposit. After keeping certain cash reserves (C.R.R.) remaining
amount is advanced in form of Loans. This process goes on continuing.
Thus credit is created by commercial bank.
12. ATM Facility :
ATM facility is an attempt made by bankers to make available 24 hours money
transactions to their customers. It is done through Automatic Teller Machine (ATM).
The Machine dispenses cash round the clock for all 365 days a year. To avail this
facility, a customer is required to maintain some amount balance in his account. This
system saves time.
ATM facility is one of the general utility services provided by the banks.
13. Debit Cards :
Debit cards are issued by commercial banks. Customer can use them for the
purchase of goods & services. When the debit card is used by a customer, the amount
of his purchases is automatically deducted from his account. There is no period of
credit given to the account holders.
14. E-Banking :
Commercial banks provide banking services through the use of electronic medium
like computers. A customer can operate his bank account through internet. Customer
can make payments of various bills like telephone bill, electricity bill, taxes, insurance
premium etc. As well as he can transfer money from one place to another place.
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E-banking helps traders, wholesaler buyers in doing their business transaction. They
can make inquiries, send or get quotations through E-mail. Payment is also settled by
transferring funds from buyers account to sellers account.
15. Demand Draft :
A bank draft is drawn by one branch on another branch of same bank. It is payable
on demand. Amount of Demand Draft is paid to the person whose name is mentioned
there in.
Through demand drafts, funds can be transferred from one place to another. A
person wishes to remit funds through bank draft, has to deposit the money with the
commission. After collecting the amount & commission bank issue the draft to the
person. A person need not necessarily be its customer. Then person gives demand
draft to other person to whom money has to be paid. Then that payment collects the
amount form the branch of the bank.
The drawer & drawee banks being the same bank draft cannot be dishonoured.
16. Letter of Credit :
Modern commercial banks play an important role in promoting internal & external
trade. In international trade, two parties i.e. Exporter & importer are not acquainted
with each other.
Exporter bears risk if he draws bill on importer after dispatching the goods. It is
because if the importers fail to pay amount of bill, the exporter will suffer heavy losses.
To avoids such risks. Some sort of arrangement is necessary. It is necessary for smooth
functioning of trade & commerce.
Letter of credit avoids such risks & helps for smooth functioning. In order to
assure exporter of his payment, the importer opens a letter of credit in favour of
exporter. Bank informs & assures exporter about his payment. Through the letter of
credit the bank in one country authorizes another bank in foreign country to honour
the cheque.
17. Credit Card :
Credit card is a latest development in the process of evolution of money. Credit
card represents a form of credit money.
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It is a system in which bank provides credit facilities to the holder of credit

cards for purchasing goods & services. It allows a person to buy goods & services upto
a certain limit without immediate payment.
Generally bank gives credit of 30 days to 45 days. Then amount is collected
from customers. On late payment interest is charged on outstanding amount. Credit
card saves the risk of carrying huge cash.
18. Bill of Exchange :
Bill of exchange is a written promise by a debtor (buyer) to a creditor (seller) to
pay money after a certain period.
Holder of bill can discount the bill with commercial banks. Banks can advance
money by deducting discount charged=s on maturity date banks get back their
payment from the person on whom bill is drawn.
19. Bearer cheque :
When the word Bearer appear on the cheque then such cheque is considered as
Bearer Cheque.
Bearer cheque is encashable at the counter of the bank. IT is negotiable. IT serves
as goods as making payment of a bearer cheque. If bearer cheque is lost, payment is
also lost. It is not famous in business world.

GIVE REASONS
1) Commercial bank provides agency functions to earn profit.
Reasons:
i) Agency functions are no banking functions performed by commercial bank on behalf of
customers. Bank act as an agent while performing this function for their account holder.
ii) Commercial bank accepts instructions from customers regarding collection of money
such as cheques, draft, interest, dividend, bill rent, demand draft etc.
iii) Bank can also make payment on behalf of their customers such as payment of insurance
premium, electricity bill, telephone bill, taxes etc.
iv) Commercial banks can undertake buying and selling of securities, shares debentures as
per the instruction of account holder. Bank also acts as the executors of the customer
will in case of death. As an attorney, banks sign the documents on behalf of customer.
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v) Bank charge commissions for all these services provided to customers thus bank earn
profit from agency functions.
2) Overdraft facility provided to current accountholders.
Reasons:
i) Current A/c is usually opened by businessmen, corporation, industrial enterprises etc.
This account facilitates them to carry out business out business transactions smoothly.
ii) Business organisation need short term loans for fulfilling working capital need.
Commercial banks allow current accountholders to withdraw the more amounts from
bank than balance in account.
iii) It is short term & temporary loan arrangement for business community. Bank charge
interest on amount overdrawn from an account.
iv) Overdraft amount is decided on credit worthiness of account holder.
v) Overdraft is sanctioned against some tangible security.
Conclusion :

So, overdraft facility is given to current account holders.

3) Saving account deposits are usually opened by salaried class.

Reasons:
i) Saving account are opened by large number of people who to do saving and deposit the
same with the bank. There are opened mainly by salaried class, middle income groups,
small traders etc.
ii) Bank accepts saving deposits to encourage saving habits among people.
iii) Bank pays small rate of interest on the balance in the saving account.
iv) There are certain restrictions on the number of times money can be withdrawn from the
account
4) Rate of interest on fixed deposits is high.
Reasons:
i) Fixed deposit is a type of account where fixed amount is deposited at once for fixed
period of time. Generally fixed deposits accounts are opened for a period of 1 year, 2
year, 5 year etc.
ii) Bank can mobilize saving of people for giving loans & advances. Fixed Deposit amount is
utilized by bank foe giving long term loans.
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iii) On long term loans bank receive higher amount of interest. So it is possible for bank to
pay higher amount of interest on fixed deposit out of interest received on loans.
iv) Fixed deposit cannot be withdrawn before maturity. So money is blocked with & used by
commercial banks.
Conclusion :

Bank pays higher rate of interest on fixed deposit.

5) The interest is not same on saving & fixed deposits.

Reasons:
i) Fixed deposit is a type of Account where fixed amount is deposited at once for fixed
period of time. Generally, fixed deposit accounts are opened for a period of 1 year, 2
years, 5 years etc. Fixed deposits mature after a considerable long period. Therefore,
commercial banks can use the funds deposited in fixed deposits for advancing long term
loans.
ii) Fixed deposit amount cannot be withdrawn by account holder before its maturity. So
Bank can use fixed deposit amount for giving long term loans. Due to this bank pay
higher rate of interest on fixed deposit.
iii) Saving deposit account promote saving habits among people. Any amount can be
deposited & withdrawn by account holder as per his need. Therefore, commercial banks
cannot use the funds deposited in saving deposits for advancing long term loans.
iv) Saving deposit amount is not easily available by bank for giving long term loans. It is
because account holders may come at any time to withdrawn their deposits. Due to this
on saving deposit bank pay lower rate of interest. Commercial banks earn more profit by
using funds in fixed deposits than in saving deposits.
Conclusion :

The interest rate is not dame on fixed & saving deposit.

6) Commercial bank gives interest on deposits.

Reasons:
i) Commercial bank accept deposit from public though saving account, current account,
fixed deposit account and recurring deposit account.
ii) Commercial bank pay higher rate of interest on fixed deposit, slightly lower on recurring
deposit and very lower on saving deposit.

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iii) The rate of interest depends upon time / period of deposit & not on amount of deposit
made.
iv) Fixed deposits are used by bank for long period. So bank pays higher rate on interest on
it. Saving deposits can be withdrawn by account holder at any time. So bank lower rate
of interest on it.
Conclusion :

Commercial banks pay interest on deposit.

7) Credit creation becomes less in presence of more cash.

Reasons:
i) Credit creation is an important function of commercial bank. People deposit their saving
with commercial bank. Same deposits are utilized by commercial bank for giving loans.
ii) So more deposit with commercial bank always increases credit creation capacity of
commercial banks & vice versa.
iii) The desire of public to hold cash in hand than to deposit in bank is called as liquidity
preference. It liquidity preference is high then credit creation will be less.
iv) Liquidity preference is an obstacle in credit creation of commercial bank.
Conclusion :

Credit creation becomes less in preference of more cash.

8) The interest is less on saving deposits.

Reasons:
i) Saving deposit account promote saving habits among people. Any amount can be
deposited & withdrawn by account holder as per his need.
ii) Saving deposit amount is not easily available by bank for giving long term loan. Due to
this bank pay lower rate of interest on saving deposit.
iii) Fixed deposits are made for a period of 2 years, 3 years, 5 years etc. So amount is
available for giving long term loans.
iv) Commercial banks earn more profit by using funds in fixed deposits than in saving
deposit.
v) Therefore, bank pay higher rate of interest on fixed deposit.
Conclusion :

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So, interest is less on saving deposit.

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9) Cheques drawn on banks are not legal tender money.

Reasons:
i) Bank cheques are the examples of optional money. It may or may not be accepted in
settlement of transactions.
ii) It does not have any legal sanction. It does not have general acceptability.
iii) People use cheques for their convenience. In discharge of debt. It is accepted on the
basis of trust.
iv) Strictly speaking cheque is not money proper. There is no guarantee of honouring.
Conclusion
So cheque is not legal tender money.
10)

Every loan creates deposit.

Reasons:i) Accepting deposits & advancing loans are two important functions of commercial bank.
ii) Loans are advanced against some tangible security.
iii) Instead of paying cash, bank opens an account in borrowers name & credit the loan
amount sanctioned.
iv) The borrower is given cheque book to withdrawn the money as & when required.
v) Thus, when a loan is granted, deposit A/c is also created.
Conclusion
Thus every loan creates deposit.
11)

Commercial banks are profit making organisations.

Reasons:i) Commercial bank is a financial institution dealing in money & credit.

ii) It accepts cash deposits from public through Saving A/c, Current A/c, Fixed deposits A/c
& Recurring A/c.
iii) Same money is lended to public against some tangible through overdraft, cash credit,
Loans, discounting of Bill etc.
iv) Commercial bank charge higher rate of interest on loans advanced & pays lower rate of
interest on Deposits accepted.

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v) Difference in between interest received & interest paid is considered as profit of

commercial bank.
Conclusion :
12)

Thus commercial banks are making institutions.

Commercial banks perform primary & secondary functions.

Reasons:
i) Accepting Deposits & Advancing loans are two primary functions of commercial banks.
Besides this function, commercial banks also perform secondary function which
includes Agency services & General utility services.
Secondary functions includes
a. Transfer of funds from one place to other.
b. Bank collect cheque and make periodic payments according to instructions of
accountholder.
c. Banks provide locker facility for safe custody of valuable documents.
d. Banks deal in foreign exchange.
e. Banks act as a underwriter for issue of shares & debentures.
Conclusion : Thus with primary functions, bank perform secondary functions by
acting as an agent of A/c holder.
13)

Commercial banks create credit.

Reasons:
i) Commercial bank is a profit making institution deals with money & credit.
ii) Credit creation is an important function of commercial banks.
iii) From every deposit received, commercial bank create a loan (after keeping aside the
cash reserve ratio)
iv) To earn more profit there is a need to create more & more credit. For instance, from a
primary deposit of Rs. 1000, commercial banks create upto Rs. 10,000 (C.R.R. 10%)
Conclusion :

Thus credit creation is an important function of commercial bank where

as credit control is done by central bank.

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14)

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COMMERCIAL BANK

Crossed cheque is considered to be safe.

Reasons:
i) Cheque is an instrument by which money can be withdrawn from an account for making
payment.
ii) When two parallel lines are drawn at the top left hand corner on face of a cheque then it
is called as Crossed cheque.
iii) Crossed cheque is never encashed at the counter of the bank. Payment is directly
credited in payees A/c.
iv) Crossed cheque is not negotiable. There is no actual handling of cash.
Conclusion :
Thus crossed cheque is considered to be safe.
15)

Bearer cheque is considered dangerous.

Reasons:i) A bearer cheque is encashed immediately at the counter of the bank.

ii) While making payment against bearer cheque, bank never find identify of payee.
iii) If bearer cheque is lost, it can be misused & encashed by its holder.
iv) The ownership of a bearer cheque can be transferred by simple delivery.
Conclusion
By considering all above points, we can conclude that bearer cheque is dangerous.
16)

There are limitations on credit creation of commercial bank.

Reasons:
i) Credit creation is an important function of commercial banks. There are many
limitations on the credit creation of commercial banks.
ii) Limitations are as under
a.
b.
c.
d.
e.
f.
g.

Amount of primary deposit.

Rate of cash reserve ratio.
Banking habits.
Liquidity preference of people.
Willingness of people to borrow.
Availability of securities with borrowers.
Credit control policy of central banks.
Conclusion : So there are many limitations on the process of credit creation.

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17)

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COMMERCIAL BANK

Commercial banks are necessary for trade & industry.

Reasons:
i) All economic process has been based on extensive trade & industrialization. Money is
the basis of all transaction.
ii) Money does not mean only coins & currency notes. It from only small part of a money
supply in economy.
iii) Bank deposit constitutes the important source of money. Without the introduction of
bank cheque & bank draft it would be impossible to transact large scale trade. In all
large scale transactions payments are made not in terms of cheque & draft.
iv) In international trade, trade is financed through bill of exchange, letter of credit etc.
v) Commercial banks perform number of primary secondary & agency functions for the
promotion of trade & industry.
Conclusion :
18)

Commercial banks are necessary for trade & industry.

Commercial banks work as an agent for its account holders.

Reasons:
i) As an agent commercial bank provide number of services to its customers.
ii) Services as agent includes
a. Collection of drafts, bills etc.
b. Purchase & sell of shares & debentures.
c. Making payment of electricity bill, insurance, rent etc.
d. Filing of Income Tax return.
e. Execution of the will of deceased person.
Conclusion :

Thus commercial banks work as an agent for its customers.

DISTINGUISH BETWEEN
1. Call Loans V/s Long Term Loans
Point of
Difference
1. Meaning

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Call Loans

Long Term Loans

Loans provided by commercial

Loans provided by commercial
Banks for a period of more than 5
Banks for a period of 7 to 15 days
years are known as Long Term
are known as Call loans.
Loans.

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2. Rate of
Interest

The rate of Interest is the Lowest.

3. Who takes?

These loans are taken by

These loans are taken by Stock
manufacturers for purchase of
brokers, share agents etc.
Fixed assets like Land or Plant etc.

4. Call-Back/
Repayment

Bank cannot call back these loans

Bank can call back these loans at
before
their
sanctioned
any time from borrower.
period/Loan Period.

The rate of Interest is the Highest.

2. Saving Account V/s Current Account

Point of
Difference

Saving Account

Current Account

1. Meaning

A current deposit is a bank

It is a type of account operated by
account
operated
by
a
salaried people who wish to save
businessman / a firm / a company
a part of their income.
for settling financial transactions.

2. Interest

A lower / Nominal rate of interest Generally, No interest is paid on

is paid on saving deposit account. current deposit account.

3.
Withdrawals

There are certain restrictions on There are no restrictions on

number of withdrawals.
number of withdrawals.

4. Overdraft
Facility

Over draft facility is not provided Over draft facility is provided

under saving deposit account.
under Current deposit account.

3. Cash Credit V/s Overdraft Facility

Point of
Difference

Cash Credit

Overdraft Facility

1. Meaning

It is a loan sanctioned by Bank to

any person against security for
certain period.

It is a facility given to current

account holders to withdraw
more amount than the actual
balance in account.

2. Loan
Amount

Generally large amount of Loan

sanctioned.

Generally small amount of

overdraft is sanctioned.

3. Period

Cash Credit is generally

sanctioned for longer period.

Overdraft is generally given

occasionally for short period.

4. Loan
Account

A separate loan account is

opened.

Separate overdraft account is not

opened.

5. Interest
charged

Rate of interest charged is lower

than that on Overdraft.

Higher rate of interest is charged

on overdraft.

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4. Fixed Deposit V/s Saving Deposit

Point of Difference

Fixed Deposit

Saving Deposit

1. Meaning

It is that type of deposit where It is that type of deposit where

a fixed sum of money is a small amount of money is
deposited for a fixed period.
saved.

2. Withdrawal

A person cannot generally

A person can withdraw money
withdraw money before the
whenever required.
maturity date.

3. Rate of
Interest

On a fixed deposit higher rate On a saving deposit lower rate

of interest is paid.
of interest is paid.

4. Who Operate

5. Purpose

6. Amount

Fixed deposit is operated by

those
individuals
and
organisation who have excess
or idle money.
Its main purpose is to get lump
sum amount on the maturity of
the deposit.

Saving deposit is operated by

those individuals who are small
traders, salary earners, etc.
Its main purpose is to save
small part of income and get
interest regularly.

In this type of deposit, larger In this type of deposit, smaller

amount of money is deposited. amount of money is deposited.

5. Current Deposit V/s Fixed Deposit

Point of Difference

Current Deposit

Fixed Deposit

1. Meaning

A current deposit is a bank

account
meant
for
a
businessman or a firm or a
company for settling financial
transaction.

2. Interest

Generally no interest is paid on

the balance in such account.

A fixed deposit is a bank

account under which a
certain fixed amount is
deposited for a definite
period.
Banks offer maximum rates
of interest for different
periods.
No such books are issued.
Only a Fixed Deposit Receipt
is issued.
Amount is deposited only
once at the time of opening
the account.
This account is for a fixed
period after which the amt is
repaid along with interest.

3. Books Given
4. Frequency of
Deposits
5. Duration

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Pay-in-slip book, cheque book

and pass book are issued to the
account holder.
Amounts can be deposited into
this account any number of
times.
This account has not fixed
duration. It may run as long as
the business continues.
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No withdrawal is permitted
before the date of maturity.
Withdrawals can be made by
However a certain amount
cheques and there are no
by way of loan can be
restrictions on the number of
granted against the security
withdrawals.
of the Fixed Deposit Receipt
(FDR).

6. Withdrawals

6. Current Account V/s Recurring Account

Point of Difference

1. Meaning

2. Interest

3. Suitability
4. Aim

Current Deposit

Recurring Deposit

A current deposit is that type of

deposit where there are no
restrictions on the deposition of
money and number of and
amount of withdrawals.

Recurring account is that type of

deposit where a fixed sum of
money is deposited every
month for a fixed period.

The interest paid on recurring

Generally, no interest is paid on
account is greater than interest
current deposits. Few banks pay
paid on current deposits and
extremely low interest on these
less than interest paid on fixed
deposits.
deposits.
Current deposits are suitable for Recurring deposits are suitable
businessman, companies and for low income group and
firms.
middle income group people.
The aim of current deposit is to The aim of recurring account is
facilitate
daily
financial facilitate
regular
saving
transactions.
tendency.

7. Cheque V/s Overdraft

Point of Difference

Cheque

Overdraft

1. Meaning

Cheque is an unconditional
It is a facility to withdraw more
order directing the banker to
amount than deposits in a
pay a certain sum of money only
account.
to the order of a certain person.

2. Who get?

The current and saving account It is provides short term credit

holders get a cheque facility.
to business community.

3. Usefulness

Cheques are useful to settle the It provides short term credit to

trade transactions.
business community.

4. Types

There are different types of

cheques such as Bearer cheque, It is one of the types of loan
Crossed cheque, Order cheque granted by commercial bank.
etc.

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8. Banking Function V/s Non-Banking Functions

Primary Function V/s Secondary Functions
Point of
Difference
1. Meaning

Banking function /
Primary Function
Banking functions are
i) Accepting deposits
ii) Lending loans
iii) Credit creation

COMMERCIAL BANK

OR
Non-Banking Function /
Secondary Functions
Non-Banking Functions are
i) Agency services.
ii) General utility services.

2. Aim

It helps business, trade and It helps the customers. Noncommerce. Banking functions are banking functions are welfare
profit oriented.
oriented.

3. Dealing

Bank
acts
as
financial
Bank provides general and utility
intermediary between the savers
services to customers.
and the borrowers.

9. Saving A/c V/s Recurring Deposit A/c

Point of Difference

Saving Account

Recurring deposit Account

1. Meaning

When
fixed
amount
is
It is the type of deposit where deposited regularly at fixed
a small amount of money is time intervals for fixed period
saved.
then it is called as Recurring
Deposit Account.

2. Withdrawals

A person can withdraw money Withdrawal is not allowed

whenever required.
before the expiry of the period.

3. Rate of Interest

Bank pays higher rate of

On a saving deposit lower rate interest than saving account
of interest is paid.
and less than fixed deposit
account.

4. Period

It is operated for a long period.

5. Purpose

Its main purpose to get lump

Its main purpose is to save
sum amount on the maturity of
part of the income.
the deposit.

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It is operated for fixed period.

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10. Cheque V/s Bank Draft

Point of Difference

Cheque

Bank Draft

1. Meaning

A draft is an order to pay money

Cheque is an unconditional
drawn by one branch upon
order directing the banker to
another branch of some bank
pay a certain sum of money only
for a sum of money payable on
to the order of a certain person.
demand.

2. Who get?

The current and saving account It is issued to anyone even to

holders get a cheque facility.
non-account holders.

3. Usefulness

Bank drafts are useful to

Cheques are useful to settle the
transfer money from one place
trade transactions.
to another.

4. Payment

There is a certainty of payment.

There is no certainty of
There is no question of
payment. It can be dishonoured.
dishonouring.

11. Loan V/s Overdraft

Point of
Difference

Loan

Overdraft

1. To whom
given

Any account holder i.e. saving,

Overdraft is sanctioned only to
current, fixed deposit can get a
current account holders.
loan.

2. Amount

Large amount is sanctioned as Overdraft is sanctioned for

loan.
smaller amount to loan amount.

3. Period

Loan is given for a longer period.

Overdraft facility is given for

shorter period.

4. Account

Separate account is maintained.

There is no need to maintain

separate account.

5. Interest

The rate of interest charged on

Higher rate of interest is charged
loans is relatively lower than that
on overdraft.
of O/d.

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OBJECTIVE TYPE QUESTIONS

Fill in the blanks with appropriate alternatives given in the brackets.
1. A _____________ cheque is the safest cheque.
(Crossed, Bearer)
2. Agency functions are a part of ________ functions of commercial banks.
(Banking, Non-Banking)
3. Deposits in fixed account are referred to as ________ deposits.
(Savings, Time, Current, Recurring)
4. A commercial bank___________ a trader in money.
(is, is Not)
5. A ____________ cheque is a negotiable instrument.
(Bearer, Crossed)
6. ____________ banks are dealers in money and credit.
(Commercial, Central)
7. Deposits on current account are referred to as _____________ deposits.
(Demand, Fixed, Savings, Recurring)
8. Loans advanced by banks create___________.
(Primary, Derivative, Fixed)
9. Loans advanced by a bank are its__________.
(Assets, Liabilities)
10. There __________limitations on multiple expansion of credit.
(Are, Are No)
11. Money-at-call notice refers to_________ loans advanced by a commercial bank.
(Long Term, Short Term, Very Long Term)
12. Credit creation is a function of _________ bank.
(Central, Commercial)
13. Deposit that lead to higher rate of interest_____________.
(Fixed deposit, Current deposit, Saving deposit, Recurring deposit)
14. Banks that develop saving habits among people__________.
(Commercial Banks, Foreign Exchange Banks, Land Development Banks, Co-Operative
Banks)
15. Two or more banks jointly give loan for fixed period__________.
(Consortium Loans, Overdraft Loans, Loans At Short Notice, Fixed Term Loans)
16. Cheques which can be encashed immediately at bank counter are called as ___________.
(Bearer Cheque, Crossed Cheque, Post-Dated-Cheque)
17. Primary function of a commercial bank is____________.
(Accepting Deposits, Selling Securities, Trustee, Referee)
18. Secondary functions of a commercial bank do not include___________.
(Collection Of Money, Transfer Of Money, Providing ATM Facility, Sale Of Securities)
19. E-banking helps____________.
(Traders, Wholesalers, Retailers, All Of These)
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20. ATM facility is available for _____________.

COMMERCIAL BANK

(6 Hours, 12 Hours, 18 Hours, 24 Hours)

State whether the following statements are TRUE or FALSE.

1. Commercial bank deals with other peoples money.
2. Bank is a financial institution deals with money.
3. Accepting deposit & granting loans & advances are two primary functions of money.
4. There is no limit on number of withdrawals from saving account.
5. Overdraft facility is granted to current account holders.
6. Higher rate of interest is paid on fixed deposit.
7. It is allowed to withdraw the amount from fixed deposits before the maturity date.
8. In Recurring deposit, a certain sum of money is periodically deposited into the bank.
9. Credit creation is an important function of commercial bank.
10. Money deposited by people in bank is considered as primary deposit.
11. The amount kept aside with Reserve Bank out of primary deposit is called as cash
reserve.
12. Commercial bank is an institution that operates for public welfare.
13. Commercial bank performs only primary functions.
14. Commercial bank can create in unlimited quantity.
15. Every loan creates deposit.
16. Every deposit create loan.
17. Banking regulation act was passed in the year 1948.
18. A low rate of interest is charged for long term loans.
19. Excess credit creations bring inflation in market.
20. Bank lends much more than what is received through deposit.
21. Different between interest received & interest paid is profit of commercial bank.
22. There can be only one commercial bank in an economy.
23. Higher the cash reserve ratio, lower is the an economy.
24. Commercial bank acts as a banker to general public.
25. Commercial banks can create unlimited credit.
26. Bearer cheque is the safest cheque.
27. Cheque is money.
28. Demand draft can be dishonoured.

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