Functions of Commercial Banks

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What is the primary reason for fixed deposits being liked by depositors?

Higher risk but higher returns

Flexibility to withdraw anytime without notice

Higher interest rates compared to other accounts (correct)

Lower interest rates compared to other accounts

What is the consequence of withdrawing more than the specified amount without prior notice?

Higher interest rate charged on credit balance (correct)

Penalty imposed on the withdrawal

Account gets suspended

No interest allowed on the credit balance

How do fixed deposits differ from current accounts in terms of withdrawal?

Fixed deposits allow unlimited withdrawals

Current accounts have higher interest rates

Current accounts require prior notice for withdrawals

Fixed deposits have a fixed withdrawal period (correct)

What is the most common way of lending by commercial banks as mentioned in the text?

Overdraft facilities for current account holders Signup and view all the answers

Why are fixed deposits also referred to as time deposits?

Because they have a fixed deposit period Signup and view all the answers

What is the main incentive for depositors to opt for an overdraft facility in a current account?

Lower interest rates compared to other types of loans Signup and view all the answers

What type of lending allows the borrower to pay interest only on the used amount?

Cash Credit Signup and view all the answers

Which type of lending involves the bank deducting its commission before paying the present price of a bill to the holder?

Discounting Bills of Exchange Signup and view all the answers

In which type of lending can the borrower withdraw small sums of money through cheques, but not exceed the credit limit?

Overdraft Signup and view all the answers

Which type of lending provides a very liquid asset that can be quickly turned into cash?

Discounting Bills of Exchange Signup and view all the answers

What is a distinguishing feature of an Overdraft compared to Cash Credit?

Interest paid only on the used amount Signup and view all the answers

What is a key characteristic of Discounting Bills of Exchange in terms of bank investment?

Quick conversion to cash Signup and view all the answers

What is the primary reason mentioned in the text for settling debts through cheques?

Convenience Signup and view all the answers

Which of the following is NOT mentioned as a secondary function of commercial banks?

Credit Card Services Signup and view all the answers

What type of credit instrument is highlighted as the most developed in the money market?

Cheque Signup and view all the answers

Which service involves banks collecting dividends and interest on shares and debentures on behalf of customers?

Collection of Dividends on Shares Signup and view all the answers

What is a key aspect of the agency services provided by banks as mentioned in the text?

Assisting with Income Tax Returns Signup and view all the answers

What is the significance of money at call and short notice for banks?

To effect desirable adjustments in the balance sheet through window dressing Signup and view all the answers

Which item constitutes the 'third line of defense' for banks?

Money at call and short notice Signup and view all the answers

Why are short-term bills like bills of exchange and treasury bills attractive to commercial banks?

Because they are highly negotiable and self-liquidating Signup and view all the answers

What type of assets do investments include for banks?

Profit yielding assets like government and non-government securities Signup and view all the answers

Why are loans and advances considered the most profitable asset for banks?

Due to the interest earned from advancing loans to individuals and firms Signup and view all the answers

Where does the item 'Acceptances and Endorsements' appear on a bank's balance sheet?

On both sides of the balance sheet as a contra item Signup and view all the answers

What are the three most important guiding principles for the distribution of assets in a bank?

Liquidity, profitability, and security Signup and view all the answers

Which item on the assets side is considered the 'first line of defense' for a bank?

Cash on hand Signup and view all the answers

What is the purpose of keeping money with the central bank or other commercial banks?

To reduce liquidity risk Signup and view all the answers

In what order are the various items on the assets side distributed?

Descending order of liquidity, ascending order of profitability Signup and view all the answers

What does 'Money at Call and Short Notice' include?

Loans to brokers and dealers Signup and view all the answers

Why are loans to brokers and dealers considered easily convertible assets?

Because they can be quickly converted into cash Signup and view all the answers