Podcast
Questions and Answers
How do banks primarily generate income from their lending and deposit acceptance functions?
How do banks primarily generate income from their lending and deposit acceptance functions?
- Through fees associated with transaction services
- By investing in government securities with deposits
- By maintaining a higher interest rate differential between loans and deposits (correct)
- By charging lower interest rates on loans than what they pay on deposits
What proportion of total deposits do banks in India typically keep as cash for withdrawals?
What proportion of total deposits do banks in India typically keep as cash for withdrawals?
- 15% (correct)
- 5%
- 10%
- 20%
What role does the concept of liquidity play in a bank's ability to meet withdrawal demands?
What role does the concept of liquidity play in a bank's ability to meet withdrawal demands?
- It ensures that banks have sufficient cash to satisfy depositors' withdrawals. (correct)
- It dictates the amount of interest rates banks can charge.
- It determines how much cash banks can lend to borrowers.
- It allows banks to provide loans regardless of deposit levels.
What is the primary function of banks in the context of surplus funds and borrowing needs?
What is the primary function of banks in the context of surplus funds and borrowing needs?
Which of the following statements is true regarding a bank's cash management?
Which of the following statements is true regarding a bank's cash management?
Which function of banks involves using a majority of deposits for purposes beyond liquidity?
Which function of banks involves using a majority of deposits for purposes beyond liquidity?
What is the significance of the interest rate spread in banking operations?
What is the significance of the interest rate spread in banking operations?
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Study Notes
Bank Deposits and Loans
- Banks act as intermediaries between depositors (those with surplus funds) and borrowers (those needing funds).
- Banks receive deposits from individuals and businesses.
- They keep a small proportion of deposits as cash reserves (e.g., 15% in India) to meet daily withdrawal demands.
- Banks utilize the majority of deposited funds to provide loans to individuals and businesses.
- Banks earn income by charging a higher interest rate on loans than they pay on deposits.
- The difference between loan interest and deposit interest is a key source of bank revenue.
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