ECONOMICS
CREDIT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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To extend loan to the poor
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To extend loan facility
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To pay salary to their staff
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To pay the depositors who might come to withdraw money
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Detailed explanation-1: -Banks in India hold around 15% as cash with themselves and with the RBI. This cash deposit is known as ‘reserve’. This helps to ensure that there is money available to the people even if there are large spendings by the bank.
Detailed explanation-2: -In India, banks these days hold about 15 percent of their deposits as cash. This deposit is kept to pay the depositors who might come to withdraw money from the bank on any given day. As only some depositors come to withdraw cash on any particular day, the bank is able to manage with this cash.
Detailed explanation-3: -Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit. Fractional reserves work to expand the economy by freeing capital for lending. Today, most economies’ financial systems use fractional reserve banking.
Detailed explanation-4: -Reserves are the amount of money that banks keep in vaults, and they are a fraction of all deposits made. In most countries, banks are heavily regulated and are required to keep a minimum percentage of all deposits, just in case someone wants to withdraw some money. This minimum percent is the reserve requirement.
Detailed explanation-5: -Banks use the major portion of deposits to extend loans. These loans are then recovered with an interest. Banks charge a higher interest for credit than deposits. Hence, the amount they receive is greater than the amount that they lend.