Read the following statements carefully : Statement 1 : Primary deposits are the cash deposits by general publ

Question 28 of 67

Q. Read the following statements carefully : Statement 1 : Primary deposits are the cash deposits by general public with commercial banks. Statement 2 : Secondary deposits are those deposits which arise on account of credit provided by the commercial banks to the people. In light of the given statements, choose the correct alternative from the following : (A) Statement 1 is true and Statement 2 is false. (B) Statement 1 is false and Statement 2 is true. (C) Both Statements 1 and 2 are true. (D) Both Statements 1 and 2 are false.

Dnh Dd CbseCBSE Class XII Board 2023MCQ· 1mImportance★★★★★

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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.

Note

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.

Watch out

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) …

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Primary deposits are direct cash deposits from the public, while secondary deposits are created by banks when they extend credit or loans.

Commercial banks play a pivotal role in an economy, not just by safeguarding money but also by facilitating transactions and, crucially, by creating credit. The foundation of their operations lies in deposits, which can be broadly categorised into two types: primary and secondary. Understanding this distinction is key to grasping how banks manage money and contribute to economic activity.

Primary deposits are the most straightforward form of deposits. They represent the actual cash or cheques that individuals, households, and businesses directly deposit into their accounts with commercial banks. When you deposit your salary, savings, or any other cash into your bank account, you are making a primary deposit. These deposits directly increase the bank's cash reserves and form the initial pool of funds that banks can then use for lending and other operations. They are essentially the real money that flows into the banking system from the public.

Note

Primary deposits are also sometimes referred to as 'cash deposits' or 'real deposits' because they involve a direct transfer of existing money from the public to the bank.

In contrast, secondary deposits do not originate from a direct cash inflow from the public. Instead, they are a consequence of the credit-creating activities of commercial banks. When a bank grants a loan to an individual or a business, it typically does not hand over physical cash. Instead, it opens a deposit account in the borrower's name (or credits an existing one) and places the loan amount into that account. This newly created deposit, which arose from the bank's lending decision rather than a direct cash deposit by the public, is termed a secondary deposit. These deposits are essentially 'created' by the bank through the act of lending.

Important

The creation of secondary deposits is central to the concept of 'credit creation' or 'money creation' by commercial banks. It demonstrates how banks can expand the money supply in an economy beyond the initial primary deposits.

Let's evaluate the given statements in light of this understanding: …

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