Q.(a)
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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 — Labour Market Peculiarity
Let’s start with something you already know from everyday life. Think about the market for mangoes. If the price of mangoes rises, sellers bring more mangoes to the market, and buyers buy fewer. The market clears — price adjusts, quantity adjusts, and everyone is happy. Now think about the market for labour. You are a worker. If your boss says, “I’ll pay you half your current salary,” would you work twice as many hours? Probably not. You might quit, or you might work the same hours because you still need to pay rent. The labour market does not behave like the mango market. That is the first clue: labour is not a commodity like fruit or steel.
What is Labour Market Peculiarity?
The term “labour market peculiarity” refers to the unique features that make the market for labour fundamentally different from markets for goods and services. These peculiarities are not minor quirks — they are structural differences that shape how wages are determined, how employment rises and falls, and why government intervention (like minimum wage laws or labour unions) exists.
The NCERT Class-12 Economics textbook (Macroeconomics, Chapter 7: “Employment: Growth, Informalisation and Other Issues”) does not give a single formula for this concept. It is a qualitative, institutional idea. So we will not invent a formula. Instead, we will understand the four main peculiarities that NCERT emphasises.
1. Labour is inseparable from the labourer
When you buy a mango, the mango and the seller are separate. You take the mango home; the seller stays in the shop. But when you hire a worker, you are hiring the person — their time, effort, emotions, health, and dignity. You cannot separate the labour from the human being. This means:
- A worker cannot be “stored” like inventory. If a factory shuts down for a month, the worker’s time is lost forever.
- Working conditions matter directly to the worker’s well-being. A bad environment affects not just output but the person’s life.
- Labour is not homogeneous. Each worker has different skills, attitudes, and productivity. You cannot replace one worker with another the way you replace one kilogram of rice with another.
Because labour is inseparable from the labourer, the human element — motivation, health, safety, dignity — becomes a central concern in labour markets. This is why labour laws exist.
2. Labour is perishable
A worker’s time today cannot be saved and used tomorrow. If a worker is idle today, that day’s labour is lost forever. You cannot “inventory” labour. This gives employers a bargaining advantage: they know that a worker who does not get hired today loses that day’s income permanently. Workers, especially those with no savings, are forced to accept lower wages or worse conditions rather than remain unemployed.
This perishability is the root of exploitation in labour markets. It is also why trade unions and minimum wage laws exist — to protect workers from being forced into a race to the bottom.
3. Labour supply is not perfectly flexible
In the mango market, if price rises, sellers can quickly bring more mangoes from the farm. In the labour market, you cannot instantly produce more skilled workers. A doctor takes years to train. A carpenter takes months to learn. Even unskilled labour is constrained by geography — a worker in Bihar cannot instantly move to Mumbai for a job.
Moreover, workers have reservation wages: the minimum wage at which they are willing to work. If the offered wage is below that, they will choose to remain unemployed rather than work. This is not irrational — it reflects the cost of commuting, the loss of leisure, or the social stigma of a low-status job.
The NCERT textbook discusses the concept of “disguised unemployment” (especially in agriculture) as a direct consequence of this peculiarity: many workers are employed but their marginal productivity is zero. They cannot be easily moved to other sectors because of skill mismatches and immobility.
4. Labour market is not perfectly competitive
In a perfectly competitive market, many buyers and many sellers exist, and no single agent can influence price. In the labour market, this is rarely true.
- Employers often have market power (monopsony). A single large factory in a small town is the only employer. Workers have no alternative, so the employer can set wages below the competitive level.
- Workers organise into unions to counter this power. Collective bargaining replaces individual wage negotiation.
- Government sets minimum wages, regulates working hours, and provides social security. These interventions are not “market distortions” — they are responses to the peculiarities of labour. …
Part (a)
(i) Role of education in economic development: Education builds human capital — it raises workforce productivity and efficiency, fosters innovation and technology adoption, improves health and social mobility, and widens the skilled-labour pool needed for growth and structural transformation. …
Part (a)(i): Education builds human capital — productivity, innovation, health, mobility. (ii) Rural banking supplies credit, mobilises savings and drives financial inclusion in India. Part (b)(i): A casual wage labourer is an irregularly employed, contract-less worker without social security. (ii) The Kothari Commission (1964–66) urged linking education to productivity/national development. (iii) Promoting renewable energy is a sustainable-development strategy (VI: environment supplies resources).
Part (a)
(i) Role of education in economic development. Education is central to human-capital formation. It raises the knowledge, skill and productivity of the workforce, lifting output and growth; it fosters innovation, research and the adoption of modern technology; it improves health, awareness and social mobility; and it equips workers to move into high-productivity modern sectors, supporting structural transformation. Education thus advances both efficiency (growth) and equity (opportunity). …
Showing the 12 most recent of 23 on this concept.
- 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.Write the answer in one sentence: At which point the determination of wage occurs in labour market?
›Reveal solutionSolution
Wage is determined where demand for labour = supply of labour.
In a competitive labour market, the wage rate is determined at the equilibrium point where the demand for labour equals the supply of labour. The demand for labour comes from employers (based on the marginal revenue product of labour) and the supply from workers. At the equilibrium wage, the quantity of labour demanded equals the quantity supplied; above it t …
- 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.
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- CBSE 2025Set ANNUAL1 markMCQQ.Which of the following statements is correct? (A) The demand for labour comes from producers (B) Demand of labour depends on its productivity (C) MPL = TPL - TP(L-1) (D) All of these
›Reveal solutionSolution
All three statements about the demand for labour are true, so the answer is (D).
The demand for labour is a derived demand: firms (producers) hire workers to produce goods, so the demand comes from producers (A). How much labour a firm wants depends on labour's productivity — the marginal product of labour (B). And the marginal product of labour is defined as MPL = TP(L) - TP(L-1), the extra total product from employing one additi …
- 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). …
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