Commercial Banks & Central Bank

1 Mark Questions

1. What are demand deposits? (All India 2014, 2011, 2010; Delhi 2013, 2012)

Ans. Demand deposits are current and savings account deposits with banks or other financial institutions, which are payable on demand. No interest payments are given on current account deposits whereas, on saving account very low rate of interest are given.

2. What are time deposits? (All India 2014,2012; Delhi 2010C; Compartment 2014)

Ans. Time deposits are fixed term and recurring deposits having a fixed period of maturity, where the term of deposit may vary. Cheques cannot be issued against them and are not payable on demand and these deposits yield interests for the depositor.

3. What is a Central Bank? (Foreign 2014; Delhi 2009C, 2008)

Ans. The Central Bank is an apex banking institution which controls the entire banking system and money supply of a country. Reserve Bank of India is the Central Bank of India.

4. Define Cash Reserve Ratio. (Delhi 2011)

Ans. The percentage of total deposits, which a commercial bank needs to keep as reserve with the Central Bank, this ratio is termed as Cash Reserve Ratio.

5. Define Statutory Liquidity Ratio. (All India 2011)

Ans. Every commercial bank is required to maintain a fixed percentage of its assets in the form of cash or other liquid assets. This is termed as Statutory Liquidity Ratio.

6. Define bank rate. (Delhi 2009,2008C)

Ans. The rate at which commercial banks can barrow funds from Central Bank for a period of more than 90 days is termed as bank Rate.

7. What is commercial bank? (All India 2008)

Ans. Commercial bank is financial institution which accepts chequeable and non- cheque able deposits from the people and offers different kind of loans for the purpose of consumption or investment.

3 Marks Questions

8. Explain the currency authority function of Central Bank. (Foreign 2014)

Ans. Central Bank of the country has the sole authority of currency issue in the country, which gives it a monopoly in issuing currency. As in India RBI issues the currency, while currency notes are printed by the subsidies of RBI and coins are minted by the Central

Government of the country, however both currency notes and coins are circulated by RBI, which gives RBI the power to control, supervise and enhance the money supply in the economy.

1. Explain lender of the last resort function of the Central Bank.

(Delhi 2014, 2010; All India 2013, 2010)

When a commercial bank fails to accommodate its financial requirements, the Central Bank acts as the lender of last resort. The Central Bank issues loans to a commercial bank against specified and approved securities of the bank.

In this way, the Central Bank ensures the smooth functioning of commercial banks and appropriate flow of credit in the economy.

10. Explain the banker to the government function of the Central Bank. (Delhi 2013, 2010; MI India 2010)

Central Bank acts as a banker, advisor and agent to the Central and State Governments. As the common public keep their cash balance, demand deposits and time deposits with commercial banks; the Central Bank manages the cash reserves and demand deposits of governments in current accounts. It carries out the exchange, remittance and other banking operations on behalf of the government, i.e. the Central Bank maintains same relation with the government as commerical banks has with genes.

1. Explain the meaning of Cash Reserve Ratio and Statutory Liquidity Ratio. (All India 2010)

Cash Reserve Ratio The percentage of total deposits, which a commercial bank needs to keep as reserve with the Central Bank, this ratio is termed as Cash Reserve Ratio.

Statutory Liquidity Ratio Every commercial bank is required to maintain a fixed percentage of its assets in the form of cash or other liquid assets. This is termed as Statutory Liquidity Ratio.

1. State any three points of distinction between Central Bank and commercial banks. (Delhi 2009; All India 2008)

Basis Central Bank Commercial Banks

Definition Central Bank is the banker of all the banks. It Commercial banks operate under the control of

is an apex body. Central Bank. Credit flow Central Bank controls the flow of credit Commercial banks create credit within the

within the economy. economy. Objective The objective of Central Bank is social The objective of commercial bank is profit

welfare. maximisation.