ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Fractional Banking is a banking system that requires banks to hold only a portion of the money deposited with them as reserves. The banks use customer deposits to make new loans and award interest on the deposits made by their customers.

Detailed explanation-2: -Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. 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.

Detailed explanation-3: -It differs from fractional-reserve banking, in which banks may lend funds on deposit, while fully reserved banks would be required to keep the full amount of each customer’s demand deposits in cash, available for immediate withdrawal.

Detailed explanation-4: -In fractional-reserve banking, the bank is only required to hold a portion of customer deposits on hand, freeing it to lend out the rest of the money. This system is designed to continually stimulate the supply of money available in the economy while keeping enough cash on hand to meet withdrawal requests.

Detailed explanation-5: -Fractional reserve lending allows banks to lend against deposits not otherwise held in reserve. If the reserve requirement is 10% of deposits, then a bank can lend up to 90% of deposits. If there is no reserve requirement, as with time deposits, for example, the bank can lend out up to 100% of the deposits.