Q.(a) State and elaborate whether the following statements are true or false, with valid arguments :
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🔒 Start your 14-day free trial to unlock the full solution →Part (a)Concept understanding — Functions Of Commercial Banks
Functions of Commercial Banks
Think of a commercial bank as a financial marketplace that sits between people who have extra money and people who need money. You already use banks — when your parents deposit their salary, when you withdraw cash for school fees, or when someone takes a loan to buy a scooter. But what exactly does a bank do with all that money?
The Core Idea
A commercial bank is a financial institution that accepts deposits from the public and uses those deposits to give loans. That's the textbook definition from NCERT. But the real magic is in the middle step: banks don't just keep your money in a vault. They lend most of it out, earn interest on those loans, and pay you a smaller interest on your deposits. The difference — called the spread — is how they make profit.
This process is called financial intermediation. Banks connect savers (who want safety and some return) with borrowers (who need capital for spending or investment). Without banks, a person with ₹10,000 saved would have to personally find someone trustworthy to lend to — which is impractical. Banks solve that problem at scale.
Primary Functions (The Two Pillars)
NCERT classifies bank functions into primary and secondary. The primary ones are non-negotiable — every commercial bank must do these.
1. Accepting Deposits
Banks offer different types of accounts for different needs:
- Savings deposits — for individuals; you can withdraw anytime but earn low interest (typically 3–4% per annum). There's usually a limit on how many withdrawals you can make per month.
- Current deposits — for businesses and institutions; you can withdraw any number of times, but you earn no interest. In return, the bank provides cheque books, overdraft facilities, and other services.
- Fixed deposits (FDs) — you lock your money for a fixed period (say 1 year or 5 years). The bank pays higher interest because it can use that money for longer loans. Early withdrawal usually incurs a penalty.
- Recurring deposits — you deposit a fixed amount every month for a fixed period. At maturity, you get the total plus interest. This is popular for building a habit of saving.
The key distinction: savings and current deposits are demand deposits (you can demand your money anytime), while fixed and recurring deposits are time deposits (you agree to leave the money for a period).
2. Granting Loans and Advances
This is where banks earn their bread. They lend money in several ways:
- Overdraft — a current account holder is allowed to withdraw more than their balance, up to a pre-approved limit. Interest is charged only on the overdrawn amount.
- Cash credit — similar to overdraft but for businesses; a credit limit is set against inventory or receivables.
- Loans — a lump sum given for a specific purpose (home loan, car loan, education loan). Repaid in equated monthly instalments (EMIs).
- Discounting bills of exchange — a business that has sold goods on credit can get immediate cash from the bank by selling its bill of exchange at a discount. The bank collects the full amount from the buyer later.
A common mistake: students think banks lend only from their own capital. In reality, banks lend mostly from depositors' money. That's why a bank run (everyone withdrawing at once) can collapse a bank — it doesn't have all the cash on hand.
Secondary Functions (Supporting Roles)
These are not mandatory but most banks offer them to attract customers and earn fee income.
Agency Functions — the bank acts as your agent:
- Collecting cheques, dividends, interest on your behalf
- Making payments (insurance premiums, utility bills, school fees)
- Buying and selling securities (shares, bonds) on your instruction
- Acting as executor or trustee of your will
General Utility Functions — services that make life easier:
- Issuing traveller's cheques and credit/debit cards
- Providing locker facilities for safe storage of valuables
- Remittance of funds (transferring money from one place to another via demand drafts, RTGS, NEFT) …
Part (b)Concept understanding — GDP Welfare Limitations
GDP Welfare Limitations
Start with an everyday intuition
Imagine you have two neighbours. One works a stressful job, commutes two hours each way, pays for expensive healthcare because the air in his city makes him sick, and spends weekends repairing flood damage to his house. The other works from home, walks to a local market, breathes clean air, and spends weekends reading in a park. Now suppose both earn exactly the same income — say ₹6 lakh per year.
If you only looked at their incomes (their "GDP"), you'd say they are equally well-off. But ask yourself: who actually lives better? The second neighbour clearly has higher well-being — less stress, better health, more leisure, a cleaner environment. Yet GDP doesn't capture any of that.
This gap — between what GDP measures (market value of production) and what we actually care about (welfare, well-being, quality of life) — is what economists call GDP welfare limitations.
The precise meaning
GDP (Gross Domestic Product) is defined as the total market value of all final goods and services produced within a country's borders in a given period. It's a measure of production, not of welfare. The NCERT textbook (Class 12, Macroeconomics, Chapter 2) explicitly states:
"GDP is not a perfect indicator of the welfare of the people."
The limitations arise because GDP:
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Ignores non-market transactions — Work done at home (childcare, cooking, cleaning) or volunteer work adds to welfare but not to GDP. If you hire a cook, GDP rises; if your spouse cooks, it doesn't.
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Ignores externalities — Pollution, congestion, and environmental damage reduce welfare but are not subtracted from GDP. In fact, cleaning up pollution adds to GDP (someone gets paid to clean), even though the pollution itself made people worse off.
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Ignores income distribution — GDP per capita can rise while the poor get poorer. A country could have high GDP but most people live poorly if the income is concentrated in a few hands.
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Ignores quality of life — Leisure time, health, education quality, and social connections are not captured. Longer working hours increase GDP but may reduce welfare.
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Ignores sustainability — Depleting natural resources (cutting forests, mining) adds to GDP today but reduces future welfare. GDP treats resource exhaustion as income, not as a loss.
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Ignores composition of output — GDP counts all production equally. A ₹1000 textbook and ₹1000 of cigarettes both add ₹1000 to GDP, even though their effects on welfare are very different.
Why it matters
If policymakers only look at GDP growth, they might make decisions that actually reduce welfare. For example:
- A government might encourage rapid industrialisation without pollution controls — GDP rises, but people get sick, healthcare costs rise (adding more to GDP), and quality of life falls.
- A country might cut down its forests to export timber — GDP rises today, but future generations lose a resource.
- A nation might celebrate rising GDP per capita while ignoring that the richest 1% captured all the growth. …
Part (a)
(i) True. The Pradhan Mantri Jan-Dhan Yojana (2014) brought crores of unbanked households into the formal financial system, enabling savings mobilisation, direct benefit transfers, credit and insurance. By channelling idle/informal savings into the banking system, it supports a more efficient allocation of financial resources (financial inclusion is a precondition for allocative efficiency). …
Part (a)(i): True — Jan-Dhan Yojana deepened financial inclusion, supporting better allocation of financial resources. (ii) True — the worker–population ratio is a standard employment indicator. Part (b)(i): Women's education raises growth, health, human capital and equity. (ii) Tourism and IT/ITES services are examples of non-agro diversification.
Part (a)
- Statement: True. The Pradhan Mantri Jan-Dhan Yojana (PMJDY, 2014) aimed at universal access to banking, opening basic accounts for crores of previously unbanked households. By bringing informal savings into the formal system, enabling direct benefit transfers (cutting out middlemen), and extending credit and insurance, it expands the pool of savings available for productive investment and improves the reach of financial intermediation. Financial inclusion of this kind is a precondition for efficient allocation of financial resources, so the step is correctly described as crucial. (Full allocative efficiency also needs competitive credit markets and financial literacy, but the direction of the statement is right.)
- Statement: True. The worker–population ratio (WPR) is a key indicator used to analyse a nation's employment situation: Worker–Population Ratio=Total populationNumber of employed persons×100 …
Showing the 12 most recent of 31 on this concept.
- CBSE 2026Set 58/1/11 markMCQQ.In an economy, exclusion of __________ may lead to under estimation of the value of Gross Domestic Product (GDP). (Choose the correct option to fill in the blank)(i) Barter Transactions(ii) Services provided by family members(iii) Illegal activities(iv) Depreciation of Assets Options : (A)(i) and(ii) (B)(ii) and(iii) (C)(iii) and(iv) (D) (i),(ii) and (iii)
›Reveal solutionSolution
GDP measures market transactions, so activities outside formal markets like barter, household services, and illegal dealings are excluded, leading to an underestimation of the true economic output.
Gross Domestic Product (GDP) is a fundamental measure in economics, representing the total monetary value of all final goods and services produced within a country's domestic territory during a specific period, typically a year. Its primary purpose is to quantify the economic activity that passes through formal markets and is therefore measurable in monetary terms. However, GDP has inherent limitations, particularly when it comes to capturing the full scope of economic activity and welfare. Certain valuable activities are intentionally or practically excluded from its calculation, which can lead to an underestimation of the true economic output and overall well-being.
Let us examine each option to understand why its exclusion might lead to an underestimation of GDP:
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(i) Barter Transactions: Barter involves the direct exchange of goods and services without the use of money. While these transactions represent genuine economic activity and create value for the participants, they are notoriously difficult to measure and assign a monetary value to for national income accounting purposes. In many informal sectors or rural economies, barter can be a significant mode of exchange. Since GDP primarily accounts for transactions involving money, the value generated through unrecorded barter transactions is largely missed, leading to an underestimation of the economy's total output.
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(ii) Services provided by family members (Non-market activities): This category includes a vast array of services performed within households, such as cooking, cleaning, childcare, elder care, gardening, and DIY repairs. These activities undoubtedly contribute significantly to household welfare and, if outsourced, would command a market price. However, because they are not exchanged for money in a formal market, they are not included in GDP calculations. The exclusion of these valuable non-market services means that GDP does not fully reflect the total productive effort within an economy, thereby underestimating the true economic contribution and welfare generated. …
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- CBSE 2026Set ANNUAL1 markMCQQ.Which of the following makes a financial institution a bank?(a) Accepting deposits(b) Lending(c) Accepting demand deposits(d) Accepting time deposits
›Reveal solutionSolution
The defining feature of a bank is accepting demand deposits (which are chequable and act as money), so the answer is (c).
Many financial institutions accept deposits and lend money, but what makes an institution a bank is that it accepts demand deposits — deposits that are withdrawable on demand and transferable by cheque. Such demand deposits function as money (they are part of the money supply), and the ability to create them throu …
- CBSE 2026Set ANNUAL1 markQ.Identify the main consideration that weigh with the commercial bank in deciding about the composition of their assets.
›Reveal solutionSolution
A commercial bank's asset-composition decision is driven mainly by the need to balance profitability against liquidity.
A commercial bank holds its assets in various forms -- cash reserves, short-term loans, investments in government securities, and long-term loans/advances to businesses. In deciding how to split its funds among these assets, the bank has to weigh two competing considerations:
- Profitability -- the bank is a profit-seeking institution, so it wants to lend/invest funds in avenues (loans, advances, securities) that earn the highest possible return.
- Liquidity -- since deposits are repayable to customers on demand or after a short notice, the bank must also keep a sufficient portion of its assets in cash or near-cash (easily convertible) form to be able to meet depositors' withdrawal demands at any time and maintain public confidence. …
- CBSE 2025Set MARCH1 markMCQQ.Easy availability of credit encourages,(a) a) Savings(b) b) Investment(c) c) Rate of interest(d) d) Disinvestment
›Reveal solutionSolution
Easy availability of credit encourages investment — option (b).
Commercial banks create credit and make loans available to households and firms. When credit is easily available (and interest rates are low), borrowing becomes cheaper, so businesses take loans to buy machinery, build factories and expand production. This increase in spending on capital goods is exactly what economists call investment.
…
- CBSE 2025Set ANNUAL1 markMCQQ.Which of the following is the secondary function of commercial banks? (A) Agency function (B) General utility function (C) Social function (D) All of these
›Reveal solutionSolution
The secondary functions of banks include agency and general utility functions (and modern social functions), so the answer is (D) All of these.
Commercial banks' functions are grouped as primary (accepting deposits and advancing loans) and secondary. The two classic secondary functions are: (A) agency functions — collecting cheques, paying bills, transferring funds, acting as agent for customers; and (B) general utility functions — issuing drafts, lockers, letters of credit, foreign exchange dealings. In addition, present-day banks carry out (C) social/developmental functions s …
- CBSE 2025Set ANNUAL1 markMCQQ.Commercial banks (A) issue currency notes (B) accept deposits from customers (C) provide loan to customers (D) both (B) and (C)
›Reveal solutionSolution
Commercial banks accept deposits and provide loans, so the answer is (D) both (B) and (C).
The primary functions of a commercial bank are (B) accepting deposits from the public (savings, current, fixed, recurring) and (C) providing loans and advances to customers. Issuing currency notes (A) is the sole function of the central bank (in India, the Reserve Bank), not of commercial banks …
- CBSE 2025Set ANNUAL1 markMCQQ.14 big scheduled commercial banks in India were nationalised in (A) 1949 (B) 1955 (C) 1969 (D) 2000
›Reveal solutionSolution
The 14 big scheduled commercial banks were nationalised in 1969, so the answer is (C).
To widen the reach of banking, direct credit to priority sectors (agriculture, small industry, exports) and reduce concentration of economic power, the Government of India nationalised 14 major scheduled commercial banks (each with deposits above a specified limit) on 19 July 1969. 1949 (A) is the year the Banking …
- CBSE 2025Set ANNUAL1 markMCQQ.Narasimham Committee Report is related to reform of which of the following? (A) Taxation reform (B) Administrative reform (C) Banking reform (D) Trade reform
›Reveal solutionSolution
The Narasimham Committee dealt with reform of the banking sector, so the answer is (C).
The Narasimham Committee, under M. Narasimham, submitted two major reports (1991 and 1998) on the financial and banking system of India as part of the post-1991 economic reforms. Its recommendations covered reducing the statutory liquidity ratio and cash reserve ratio, deregulating interest rates, improving capital adequacy and asset quality (prudenti …
- CBSE 2025Set ANNUAL1 markMCQQ.How many banks were nationalised on April 15, 1980? (A) 20 (B) 6 (C) 8 (D) 10
›Reveal solutionSolution
On 15 April 1980, 6 banks were nationalised, so the answer is (B).
India nationalised banks in two major rounds. The first was in July 1969, covering 14 large scheduled commercial banks. The second round, on 15 April 1980, nationalised 6 more private-sector banks (those with deposits above a specified limit), t …
- CBSE 2025Set ANNUAL1 markQ.Write any one mode of digital transactions.
›Reveal solutionSolution
Any one electronic mode of payment is acceptable — for example, UPI (Unified Payments Interface).
In the RBSE/CBSE Class-12 money-and-banking chapter, digital (cashless) transactions are payments made electronically through the banking system rather than in physical currency. A widely used mode in India is UPI (Unified Payments Interface), which lets a person transfer money instantly from one bank account to another using a smartphone app.
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- CBSE 2025Set ANNUAL1 markQ.What is a commercial bank?
›Reveal solutionSolution
A commercial bank accepts public deposits and lends/invests those funds for profit, performing both primary and secondary banking functions.
A commercial bank is a profit-oriented financial institution that acts as an intermediary between savers and borrowers. Its main functions are:
- Primary functions: accepting deposits (savings, current, fixed/term deposits) from the public, and granting loans and advances (cash credit, overdraft, term loans, discounting bills) to individuals, businesses and government using those deposited funds.
- Secondary functions: agency services (collecting cheques/bills, paying insurance premiums, transferring funds on a customer's behalf) and general utility services (issuing drafts, lockers/safe custody, foreign exchange dealing). …
- CBSE 2024Set MARCH1 markQ.Match the following (Column A item: Domestic service):
A B 11) SMC a) Zero profit 12) Normal Profit b) Non-monetary exchange 13) Domestic service c) ΔTC/ΔQ 14) Money d) Trade in goods and services 15) Balance of payment e) QD = QS f) Medium of Exchange ›Reveal solutionSolution
Domestic service matches (b) Non-monetary exchange.
Domestic services rendered within one's own household — for example, the unpaid work done by a homemaker — do not pass through the market and involve no money payment. They are therefore a form of non-monetary (non-market) exchange and are one reason GDP understates true economic welfare, since such valuable services a …
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