Commercial Banks Short Answer Type Questions

Question 1.
State the role of a commercial bank in the economic development of a nation.
Answer:

  • It helps the banks to promote capital formation
  • It helps in investment in new enterprises
  • It helps in the promotion of trade and industry
  • It helps in the development of agriculture
  • It helps in balanced development of different regions
  • It helps in influencing economic activity
  • It helps in implementation of monetary policy
  • It helps in monetization of economy
  • It helps in export promotion cells

Question 2.
State the agency functions of commercial banks.
Answer:
The agency functions of commercial banks are as follows:

  • To collect and clear cheque, dividends and interest warrant
  • To make payment of rent, insurance premium etc
  • To deal in foreign exchange transactions
  • To purchase and sell securities
  • To act as trusty, attorney, correspondent and executor
  • To accept tax proceeds and tax returns

Question 3.
State the general utility functions of commercial banks.
Answer:
The general utility functions of a commercial banks are as follows;

  • To provide safety locker facility to customers
  • To provide money transfer facility
  • To issue traveller’s cheque
  • To act as referees
  • To accept various bills for payment e.g. phone bills, gas bills, water bills etc
  • To provide merchant banking facility
  • To provide various cards such as credit cards, debit cards, smart cards etc.

Question 4.
State the advantages of letter of credit.
Answer:

  • It gives the exporter an absolute assurance that the bill of exchange drawn by him will be honoured.
  • It enables the exporter to realize the amount of the bill immediately by negotiating it with any banker
  • Based on the strength of letter of credit, the exporter can secured advice from a bank for the purpose of procuring or processing toads to be exported
  • It enables the importer to import goods on credit on the strength of credit of issuing bank
  • It gives an assurance to the importer that the required shipping documents are duly enclosed by the exporter

Question 5.
What is credit creation? Explain with examples?
Answer:
Credit creation is an important function of commercial banks. They create credit for the purpose of lending to all types of customers. When a commercial bank advances a loan to its consumer, liquid cash will not be lent. instead it opens an account in the borrower’s name & credits his account with the amount of the loan such a deposit is indeed credit creations-& this deposit is called secondary or derivative deposit.

On the other hand deposit opened by a customer with liquid cash is called primary deposit. Banks have the ability to create credit many times more than their primary deposits. This credit creation help s to increase the money supply so as to promote economic development in the country. Banks do not create credit out of this air, but it transmit other forms of wealth into moneys. The credit creditors can be explained with following example.
A cash deposit of Rs. 200 0 is made with bank ‘A’
Now bank ‘A’ lends the balance of money after keeping 10% cash reserves. Its balance sheet will then appears as follows.
Balance sheet of Bank A

Deposits 2,000 Cash 200
  Loans 1,800
2,000 2,000

When borrowers gets Rs. 1,800 they make payment to their creditors and they in turn deposit in their bank B. The balance sheet of Bank B will then appear as follows
Balance Sheet of Bank B

Deposits 1,800 Cash 1,800
 
1,800 2,000

Now bank B lends the balance of money after keeping 10% cash reserves. Its balance sheet will then appear as follows
Balance Sheet of Bank B

Deposits 1,800 Cash 180
  Loans 1,620
2,000 1,800

The borrowers of the loans of Rs. 1,620 may pay their debts and this amount finds its place in the bank ‘C’. The balance sheet of Bank C appear as follows

Deposits 1,620 Cash 162
  Loans 1,458
1,620 1,620

This process continues till last deposit feumes to small to create any more loans.