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Money and Credit
Question
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Explain the loan activities of Banks.

Answer

The loan activities of Banks:

(i)Banks keep only a small proportion of their deposits as cash with themselves. This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day.

(ii)Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash.

(iii)Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities. 

(iv)Banks make use of the deposits to meet the loan requirements of the people. In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).

(v)Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

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Some More Questions From Money and Credit Chapter

Look at a 10 Rupee note. What is written on top? Can you explain this statement?

In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

Analyse the role of credit for development.

Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss.

In India, about 80 per cent of farmers are small farmers, who need credit for cultivation.

(a) Why might banks be unwilling to lend to small farmers?

(b) What are the other sources from which the small farmers can borrow?

(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.

(d) Suggest some ways by which small farmers can get cheap credit.

Majority of the credit needs of the _________ households are met from informal sources.

_________ costs of borrowing increase the debt-burden.

_________ issues currency notes on behalf of the Central Government.

Banks charge a higher interest rate on loans than what they offer on ________.

_________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.