Name: Exploring Money as a Medium of Exchange in Our World
Uploaded: 2019-07-19
Duration: 4 min 39 s
Description: We do different daily transactions. Let’s learn how money is a part of these transactions, how things are different than before with money, and how it is a medium of exchange.

Question

Explain the various credit and loan activities of Banks with an example?

Accepted Answer

Commercial Banks advances loans against some approved security (collateral). In India, these days banks hold about $15$ per cent of their deposits as cash.

This money is kept to pay depositors who may want to withdraw their money on any day as free will.

The majority of the deposits are used to extend loan facilities to customers.

This credit (Loan) facility refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. It serves two purposes:

Banks work as intermediaries between those who have surplus money (depositors) and those people who are in need of money (borrowers).

Banks Charge higher Interest on the loans as compared to the interest paid to the deposit. The difference between the two rates is the bank’s profit.

Example: Let the banking authority has decided that the cash reserve ratio is $20$ percent. So, the bank must keep $20$ percent of its current deposit in the form of cash to make cash payments to persons who come to withdraw money.

A person called A, deposits Rs. $1, 000$ in the bank. The bank’s deposits increase by Rs. $1, 000$ . As per rule the bank keeps $20 %$ of $1, 000$ as cash which is $200$ .

So the bank keeps Rs $200$ to make cash payments. After deducting $200$ from $1, 000$ the remaining amount is $800$ .

So the bank can land out Rs. $800$ in the form of loan.

Explain the various credit and loan activities of Banks with an example?

Important Questions on Money and Banking

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