RBSE Solutions Class 12 Economics Chapter 18 Commercial Bank Meaning and Function

RBSE Class 12 Economics Chapter 18 Practice Questions

RBSE Class 12 Economics Chapter 18 Multiple Choice Questions

Question 1. The Primary function of a bank is :
(a) To accept deposits and advance loans
(b) To issue currency
(c) To work as a government bank
(d) Providing economic assistance to bank
Answer: (a) To accept deposits and advance loans
In simple words: The main job of a bank is to take money from people who want to save it and then lend that money to others who need it. This helps money move around in the economy.

🎯 Exam Tip: Remember that accepting deposits and advancing loans are the two core functions from which most other banking services arise.

Question 3. What is ATM facility?
(a) To open a bank counter for 24 hours
(b) Immediate loan facility from bank
(c) Providing 24 hours banking facility a day through automatic computerised machines.
(d) Normal teller counter of a bank.
Answer: (c) Providing 24 hours banking facility a day through automatic computerised machines.
In simple words: An ATM lets you do basic bank tasks like taking out money or checking your balance any time of day or night. It's like having a small, automated bank branch available all the time.

🎯 Exam Tip: When defining a facility, include its primary purpose (what it does) and its key characteristic (how it does it, e.g., "automatic computerised machines").

Question 4. Requisite for mobile banking is :
(a) Smart phone
(b) Internet
(c) Bank Account
(d) All of the options
Answer: (d) All of the options
In simple words: To use mobile banking, you need a smartphone, an internet connection, and a bank account. All these parts work together to let you manage your money from your phone.

🎯 Exam Tip: For "All of the options" questions, quickly check if each option is genuinely necessary. If even one is optional, "All of the options" would be incorrect.

Question 5. Through which plan, people can open their bank accounts free of cost?
(a) Prime Minister Self-Employment Plan
(b) Prime Minister Jan Dhan Yojna
(c) Prime Minister Relief Fund Plan
(d) National Savings Plan
Answer: (b) Prime Minister Jan Dhan Yojna
In simple words: The Prime Minister Jan Dhan Yojana is a special government plan that helps everyone open a bank account without needing to pay any fees. This helps more people use banking services.

🎯 Exam Tip: When answering questions about government schemes, try to recall the full name and its main benefit clearly.

RBSE Class 12 Economics Chapter 18 Very Short Answer Type Questions

Question 1. Define Commercial Bank.
Answer: A commercial bank is a financial institution that accepts deposits from people and offers loans for various purposes like consumption or investment. It serves as a middleman between those who have extra money and those who need money. These banks are crucial for economic activity by managing money flow.
In simple words: A commercial bank takes money from savers and gives it as loans to others.

🎯 Exam Tip: A good definition includes what something is (financial institution), what it does (accepts deposits, offers loans), and its purpose (consumption, investment).

Question 3. Explain the term Overdraft.
Answer: An overdraft facility allows current account holders to withdraw more money than what is available in their bank account. This is a short-term lending arrangement provided by the bank, usually for a limited period and amount. It helps businesses and individuals meet urgent cash needs temporarily.
In simple words: Overdraft means taking out more money than you have in your bank account, up to a certain limit.

🎯 Exam Tip: For economic terms, define what it is, who benefits, and its main purpose.

Question 4. What is Internet Banking ?
Answer: Internet banking allows bank customers to perform banking services and transactions online using the internet. This includes checking balances, transferring money, and paying bills, all accessible 24 hours a day from anywhere. Customers need a special login ID and password to access these digital services. It offers convenience and speed for managing finances.
In simple words: Internet banking lets you do bank tasks like checking money or sending it online using a computer or phone.

🎯 Exam Tip: When explaining a modern banking service, mention its key features (online, 24/7 access) and requirements (login credentials).

Question 5. Write the full form of ATM.
Answer: The full form of ATM is Automated Teller Machine. This machine allows customers to perform basic banking functions without needing a bank employee.
In simple words: ATM stands for Automated Teller Machine.

🎯 Exam Tip: Always state the full form clearly, and if possible, add a brief, simple explanation of its function.

RBSE Class 12 Economics Chapter 18 Short Answer Type Questions

Question 1. Explain the difference between savings account and current account.
Answer: The key differences between Savings Accounts and Current Accounts are:
Savings Account:
1. This account is mainly for saving money and helps people earn interest on their deposits.
2. It is best for small savers and salaried individuals who do not need to make many transactions.
3. There are usually limits on how many times you can withdraw money in a month.
4. Banks pay interest on the money kept in a savings account.
Current Account:
1. This account is designed for frequent and regular transactions, often by businesses.
2. It is suitable for large users like companies, public enterprises, and business owners.
3. There is generally no limit on the number of withdrawals or transactions each day.
4. Banks do not pay any interest on the money held in a current account; instead, they might charge a service fee. It acts more as a transaction hub than a savings tool.
In simple words: Savings accounts are for saving and earn interest, with fewer withdrawals. Current accounts are for businesses, have unlimited transactions, and don't earn interest.

🎯 Exam Tip: When explaining differences, use clear, distinct points for each category and focus on the purpose, target users, and key features like interest and transaction limits.

Question 2. State the primary functions of banks.
Answer: The primary functions of banks are:
1. Accepting Deposits: Banks take money from the public in various types of accounts like savings, current, and fixed deposits. This helps people save money safely.
2. Advancing Loans: Banks lend money to individuals and businesses for different needs, like buying a home or starting a business. They earn interest from these loans.
3. Credit Creation: Banks use the deposits they receive to create new loans, effectively increasing the money supply in the economy. This plays a big role in economic growth.
4. Agency Services: Banks perform tasks on behalf of their customers, such as collecting cheques, paying bills, and managing investments.
5. Other Services: Banks offer various additional services like locker facilities, foreign exchange, and issuing credit cards. These services add convenience for customers.
In simple words: Banks mainly take money from people, give out loans, and help create more money in the system. They also do other tasks like paying bills for you and offer special services like lockers.

🎯 Exam Tip: List primary functions clearly and give a brief, simple explanation for each. Group related services to show a comprehensive understanding.

Question 3. What is Mobile Banking? Explain.
Answer: Mobile banking is a service that allows bank customers to do their financial transactions using a mobile device like a smartphone or tablet. Unlike internet banking which often uses a web browser, mobile banking typically uses a special application (app) provided by the bank. This service is available 24 hours a day, allowing customers to access their accounts, transfer money, and make payments from anywhere. It brings the bank's services directly to the customer's fingertips, making banking more flexible.
In simple words: Mobile banking is a way to do bank tasks on your phone using a special app. It lets you manage your money any time, from anywhere.

🎯 Exam Tip: When explaining a concept, clarify what it is, how it works (using an app), its benefits (24-hour access, remote transactions), and how it differs from similar services (e.g., internet banking).

Question 4. Write down any two services provided by banks presently.
Answer: Two services provided by banks today are:
1. Locker Facility: Commercial banks offer locker services for customers to safely keep their valuables like jewelry, important documents, and other precious items. This service ensures security for valuable possessions.
2. Foreign Exchange Facility: Banks help customers exchange different currencies. This is very useful for people who travel internationally or engage in international trade.
In simple words: Banks offer lockers to keep valuable things safe and help change one country's money into another's.

🎯 Exam Tip: When asked for "any two" services, choose distinct and important ones and provide a concise explanation for each.

Question. What are the limitations of credit creation by banks ?
Answer: The limitations of credit creation by banks are:
1. Level of Development of Banks: In countries where banking services are not well-developed, the ability of banks to create credit is limited. A mature banking system is essential for high credit creation.
2. Attitude of Public: The public's banking habits directly influence credit creation. If people prefer to keep cash instead of depositing it in banks, the banks will have less money to lend, reducing credit creation.
3. Monetary Policy of Central Bank: A central bank's monetary policy significantly affects credit creation. A liberal policy encourages more lending and credit creation, while a rigid policy restricts it.
4. Level of Development in Business and Industry: Countries with advanced industrial and business development tend to have more banking transactions. This leads to a higher capacity for credit creation, as there is more demand for loans and deposits. Strong economic activity provides fertile ground for credit expansion.
In simple words: How much credit banks can create depends on how many banks there are, if people use banks often, what the central bank's rules are, and how well businesses are doing.

🎯 Exam Tip: List each limitation clearly with a brief explanation. Ensure the explanation links directly back to how that factor limits credit creation.

RBSE Class 12 Economics Chapter 18 Essay Type Questions

Question 1. Define commercial bank. Also, explain in detail the functions of commercial banks.
Answer: A commercial bank is an institution that provides financial services such as accepting deposits, offering business loans, and providing basic investment products. It acts as a bridge between those with surplus money and those who need funds for various purposes.
Economists offer several definitions:
1. According to the Oxford dictionary, a commercial bank is a financial institution that accepts deposits from people and offers loans for consumption or investment.
2. The Indian Banking Companies Act, 1949, states that banking companies are those that conduct banking business, including accepting deposits from the public that are repayable on demand or otherwise, and withdrawable by cheque, draft, or order.
3. Findlay Shirras defined a banker as an individual, firm, or company that handles the business of depositing money or currency, uses this money to provide credit, and pays out deposits by draft, cheque, or order. This highlights the crucial role of credit in a bank's operations.
The functions of commercial banks can be broadly divided into three categories:
1. Primary or Main Functions:
(a) Accepting Deposits: This is a very important function. Banks accept money from the public through different accounts:
* Savings Account: For individuals to save money and earn interest.
* Fixed Deposit Account: Money is deposited for a fixed period, earning higher interest.
* Current Account: For businesses, allowing frequent transactions without interest.
* Recurring Deposit Account: Regular deposits made over a period, earning interest.
* Pradhan Mantri Jan-Dhan Yojana Account: A government scheme for financial inclusion, allowing zero-balance accounts.
(b) Advancing Loans: Banks provide loans to their regular customers for various purposes. Loans are granted in different ways:
* Loans or Advances: Fixed amounts given for a fixed period, often against security.
* Cash Credit: A facility for businesses to borrow money up to a certain limit against current assets like stock.
* Overdraft: Allows current account holders to withdraw more than their balance, for short-term needs.
* Discounting Bills of Exchange: Banks purchase bills of exchange from sellers before their due date, providing immediate cash to the seller, deducting a discount fee.
2. Agency-related Functions: Banks act as agents for their customers, performing services like:
* Cheque bill collection and payment.
* Payments and receipts on behalf of customers.
* Sale and purchase of foreign securities.
3. General Utility Functions: Banks offer various other useful services:
* Providing locker facilities for safe-keeping of valuables.
* Dealing in foreign exchange.
* Providing traveller's cheques.
* Credit card and ATM facilities.
* Internet and mobile banking facilities.
* Collecting and publishing financial information.
* Arranging public loans.
These diverse functions make commercial banks indispensable to a modern economy, facilitating trade, investment, and personal finance.
In simple words: A commercial bank takes money from people and lends it out. Its main jobs are accepting different types of deposits (like savings or fixed) and giving loans (like cash credit or overdrafts). It also does other jobs for customers, like collecting cheques or providing lockers.

🎯 Exam Tip: For comprehensive answers, start with a clear definition, then categorize functions logically (e.g., primary, agency, general utility) and provide specific examples under each category.

Question 2. What do you mean by credit creation ? Explain the methods of credit creation adopted by the commercial banks.
Answer: Credit creation refers to the process by which commercial banks expand the money supply in an economy by giving out more loans than the initial deposits they receive. This unique power of banks allows them to multiply loans and advances based on the primary deposits of their account holders, thereby increasing the amount of money circulating in the economy. Understanding this concept is fundamental to grasping how modern economies function.
The main methods of credit creation adopted by commercial banks are:
(i) By Accepting Deposits: When people deposit money into their accounts, banks keep a small portion as reserves and lend out the rest. The loaned money is then deposited back into the banking system, creating new deposits, and the process continues. This is often called the "deposits create loans and loans create derived deposits" principle.
* Primary deposits: These are real cash deposits made by customers.
* Derived deposits: These deposits arise when a bank sanctions a loan and credits the amount to the borrower's account. These are not new cash but are created in the process of lending.
(ii) By Discounting Bills of Exchange: Banks also create credit by purchasing bills of exchange (promises to pay at a future date) from traders before their maturity date. The bank pays the trader immediately, deducting a small discount, and then collects the full amount from the debtor when the bill matures. This provides immediate liquidity to businesses.
(iii) Example of Credit Creation:
Let's say an initial deposit of Rs. 20,000 is made in a commercial bank. If the Cash Reserve Ratio (CRR) is 20%, the bank must keep 20% of the deposit (Rs. 4,000) aside as reserves. The remaining amount (Rs. 16,000) can be given as a loan. This loan amount is not given in cash but is credited to the borrower's account. The borrower then uses this money, which eventually gets deposited into another bank or the same bank, creating a new deposit. The cycle continues.
Using the formula for total demand deposit:
Total Demand Deposit (AD) = \( \frac{\Delta O}{R} \), where \( \Delta O \) is the initial deposit and R is the Cash Reserve Ratio.
Derived deposit value (C) = Total Demand Deposit - Initial Deposit
In this example:
Initial deposit \( (\Delta O) \) = Rs. 20,000
Cash Reserve Ratio (R) = 20% or 0.20
Total Demand Deposit = \( \frac{20,000}{0.20} = \text{Rs. } 1,00,000 \)
Credit Creation (C) = Total Demand Deposit - Initial Deposit
\( \implies \) C = Rs. 1,00,000 - Rs. 20,000 = Rs. 80,000
So, from an initial deposit of Rs. 20,000, the bank can create credit worth Rs. 80,000. This process demonstrates how a small initial deposit can lead to a much larger amount of credit in the economy.
The process of credit creation assumes: (1) A cheque from one bank can be deposited in another. (2) The cash fund ratio of the bank stays constant. (3) People borrow until the bank's maximum lending limit is reached. (4) Banks always try to lend up to their maximum limit.
In simple words: Credit creation is how banks make more money available for lending than they initially received as deposits. They do this by lending out most of the money deposited with them. When that money is spent and redeposited, new loans can be made again, making the money supply bigger.

🎯 Exam Tip: Define credit creation clearly and then detail the methods. When using an example, ensure all steps are shown and calculations are precise, including the final conclusion.

RBSE Class 12 Economics Chapter 18 Other Important Questions - Multiple-Choice Questions

Question 2. Bank is an institution which :
(a) Deals in receipt and payment of currency
(b) Invests the money
(c) Grants loan
(d) All of the options
Answer: (d) All of the options
In simple words: A bank does many things: it handles cash, puts money into different things to grow it, and gives out loans. All these actions are part of what a bank does.

🎯 Exam Tip: When all options seem correct for a broad question about functions, "All of the options" is often the correct choice.

Question 3. Which of the following is not a task of commercial bank ?
(a) Granting loan
(b) Accepting deposit
(c) Creation of credit
(d) Control of credit
Answer: (d) Control of credit
In simple words: Commercial banks grant loans, accept deposits, and create credit, but the central bank, not commercial banks, controls the total amount of credit in the economy.

🎯 Exam Tip: Distinguish between the functions of commercial banks and central banks; credit control is typically a central bank's role.

Question 4. Banks accept deposits in :
(a) Saving A/c
(b) Current A/c
(c) Fixed deposit A/c
(d) All of the options
Answer: (d) All of the options
In simple words: Banks accept money from people in various types of accounts like savings accounts for regular deposits, current accounts for businesses, and fixed deposit accounts for long-term savings.

🎯 Exam Tip: Be familiar with the main types of deposit accounts offered by commercial banks.

Question 5. Origin of word 'Bank' is from :
Answer: The word 'Bank' comes from the Italian word 'Banco'. In early Italy, money exchangers used to do their business while sitting on benches.
In simple words: The word 'Bank' came from the Italian word 'Banco'.

🎯 Exam Tip: For origin-related questions, recall the source language and the original term if possible.

Question 6. The task of a commercial bank is :
(a) Accepting deposit
(b) Advancing loans
(c) Agency operation
(d) All of the options
Answer: (d) All of the options
In simple words: Commercial banks do many things like taking in deposits, giving out loans, and working as agents for their customers. All these are important tasks.

🎯 Exam Tip: This question tests a broad understanding of commercial bank functions. If all listed options are indeed functions, choose "All of the options".

Question 7. Modern banking business was started in:
(a) America
(b) Europe
(c) India
(d) China
Answer: (b) Europe
In simple words: Modern banking, as we know it today, began in Europe. This is where many of the key banking practices were first developed.

🎯 Exam Tip: Historical questions often require remembering key regions or time periods. For banking, Europe is the origin of many modern practices.

Question 8. Credit economics means:
(a) payment to be done in future
(b) from the depositing party
(c) through confidence
(d) None of the options
Answer: (a) payment to be done in future
In simple words: In simple economics, credit means getting something now with the promise to pay for it later. It's like borrowing against future earnings.

🎯 Exam Tip: Understand the fundamental concept of credit as a future obligation, not just as a loan. It means you get something now and settle the payment later.

Question 9. If cash reserve ratio increases the credit value then the value of cash creation :
(a) Increases
(b) Decreases
(c) Remains same
(d) Depends on the amount
Answer: (b) Decreases
In simple words: If banks have to keep more money aside (higher cash reserve ratio), they have less money to lend out. This means less new credit can be created in the economy.

🎯 Exam Tip: Remember the inverse relationship: a higher cash reserve ratio means banks must hold more cash, which reduces their capacity to create credit, thus decreasing the value of cash creation.

Question 1. Origin of the word “Bank” is from which word?
Answer: The word 'Bank' originated from the Italian word 'Banco'. This historical connection shows how ancient practices influenced modern financial terms.
In simple words: The word 'Bank' came from the Italian word 'Banco'.

🎯 Exam Tip: Knowing the etymology of economic terms can sometimes offer insight into their historical context and evolution.

Question 2. Where was modern banking developed ?
Answer: Modern banking was primarily developed in Europe. Many foundational banking principles and institutions emerged in European cities, shaping the financial systems we see today.
In simple words: Modern banking first started in Europe.

🎯 Exam Tip: Be aware of the historical geographical origins of major economic developments.

Question 3. In India, commercial banks are regulated by which act?
Answer: In India, commercial banks are regulated by the 'Indian Banking Companies Act, 1949'. This act provides the legal framework for their operations and ensures stability in the banking sector.
In simple words: Indian commercial banks follow rules from the 'Indian Banking Companies Act, 1949'.

🎯 Exam Tip: For legal or regulatory questions, remember the exact name and year of the relevant act.

Question 4. Saving Account of banks is suitable for which type of people?
Answer: A savings account in banks is most suitable for small depositors and salaried employees. These individuals typically want to save money, earn some interest, and make occasional withdrawals, rather than frequent transactions.
In simple words: Saving accounts are good for people who save small amounts of money and those who get a salary.

🎯 Exam Tip: Link the type of account to the needs and typical behavior of its primary users.

Question 5. What is demand Saving ?
Answer: Demand savings are deposits that banks must pay back to customers whenever they are requested or "demanded". This includes money in savings and current accounts that can be withdrawn at any time without prior notice. These are liquid funds accessible on demand.
In simple words: Demand savings are money you can take out from your bank whenever you ask for it.

🎯 Exam Tip: The key characteristic of "demand savings" is immediate availability upon the customer's request.

Question 7. What is Pradhan Mantri Jan-Dhan Yojana ?
Answer: The Pradhan Mantri Jan-Dhan Yojana is a government scheme in India aimed at financial inclusion, allowing common people to open bank accounts with a zero balance. Under this scheme, account holders can also avail a loan facility of Rs. 5,000 if their accounts are operated regularly. This initiative helps bring banking services to a wider population, especially those without previous access.
In simple words: It's a government plan that helps people open bank accounts with no minimum balance and get small loans if they use their account often.

🎯 Exam Tip: When describing government schemes, highlight the target beneficiaries, primary features (like zero balance), and any specific benefits (like loan facilities).

Question 8. What is an overdraft ?
Answer: An overdraft is a banking facility that allows a current account holder to withdraw an amount exceeding the actual balance available in their account, up to a pre-set limit. This serves as a short-term credit facility, providing flexibility for immediate financial needs. Banks usually charge interest on the overdrawn amount.
In simple words: An overdraft lets you take out more money from your bank account than you have, up to a certain agreed limit.

🎯 Exam Tip: Explain what an overdraft is, who typically uses it, and its main benefit (short-term liquidity).

Question 9. What do you mean by agency services of bank?
Answer: Agency services of a bank refer to the various functions that banks perform on behalf of their customers, acting as their agents. These services can include collecting cheques, making payments, managing investments, and handling foreign exchange transactions. Banks typically charge a fee for these services. These services simplify financial management for customers.
In simple words: Agency services are tasks banks do for their customers, like collecting money or paying bills, acting on their behalf.

🎯 Exam Tip: Define agency services by stating who performs them, for whom, and give a few common examples.

Question 10. What type of account is suitable for businessmen ?
Answer: A current account is most suitable for businessmen. This type of account allows for unlimited transactions, which is essential for businesses that make frequent payments and receipts. It supports their daily operational needs without restrictions.
In simple words: Businessmen mostly use current accounts for their money because they need to do many transactions every day.

🎯 Exam Tip: Relate the characteristics of a bank account type (like unlimited transactions) to the specific needs of a user group (like businessmen).

Question 11. What is a bearer cheque?
Answer: A bearer cheque is a cheque that can be cashed by anyone who physically presents it at the bank. It does not require endorsement by the payee and is payable to the person who bears or carries it. This type of cheque is simpler but carries a higher risk if lost or stolen.
In simple words: A bearer cheque can be cashed by whoever holds it, without needing any special signature from the person it's written to.

🎯 Exam Tip: Focus on the key characteristic of a bearer cheque: it is payable to the person holding it.

Question 12. What is crossed cheque ?
Answer: A crossed cheque is a cheque that has two parallel lines drawn across its face, usually on the top left corner. This indicates that the payment of the cheque can only be made through a bank account and cannot be cashed directly over the counter. The money will be credited to the account of the person whose name is written on the cheque, ensuring safer transactions. This helps prevent theft and ensures proper tracking of funds.
In simple words: A crossed cheque means the money can only go into a bank account and cannot be taken out as cash directly from the counter.

🎯 Exam Tip: Remember that the defining feature of a crossed cheque is that payment must be made to a bank account, indicated by the two parallel lines.

Question 14. What are primary deposits ?
Answer: Primary deposits are those deposits that are made in a bank using actual cash or physical currency by the depositor. These are fresh injections of money into the banking system, forming the foundation upon which banks can create further credit.
In simple words: Primary deposits are simply real cash money that someone puts into their bank account.

🎯 Exam Tip: Distinguish primary deposits as actual cash deposits, which differ from derived deposits created through loans.

Question 15. What are derived deposits ?
Answer: Derived deposits, also known as secondary deposits, are those that arise when banks grant loans. Instead of giving borrowers cash, banks credit the loan amount to their accounts. These new account balances are considered derived deposits, as they are created through the lending process rather than from an initial cash deposit. They are crucial for credit expansion.
In simple words: Derived deposits are bank account balances created when a bank gives a loan, not when someone deposits actual cash.

🎯 Exam Tip: Emphasize that derived deposits are generated from the lending activity of banks, as opposed to primary deposits which are direct cash inflows.

Question 16. Write the name of Central Bank of India.
Answer: The Central Bank of India is known as the Reserve Bank of India (RBI). It is the main banking institution that regulates all other banks in the country and manages monetary policy.
In simple words: The central bank of India is called the Reserve Bank of India.

🎯 Exam Tip: Know the full name of a country's central bank, as it plays a critical role in its economy.

Question 17. How do banks provide 24-hour service to the customers ?
Answer: Banks provide 24-hour service to their customers primarily through Internet banking. This digital platform allows customers to access their accounts, perform transactions, and manage funds at any time of day or night, without needing to visit a physical bank branch. Mobile banking apps also contribute significantly to this continuous service.
In simple words: Banks offer 24-hour service using internet banking and mobile apps, so customers can do bank work anytime online.

🎯 Exam Tip: Focus on the modern technological means (Internet banking, mobile apps) that enable round-the-clock banking services.

Question 18. What do you mean by credit creation ?
Answer: Credit creation refers to the process by which a bank expands its lending activity, thereby increasing the money supply in the economy. This happens when a bank grants more loans to consumers and businesses than the actual cash deposits it holds, resulting in a multiplication of money in circulation. This expansion of credit supports economic growth.
In simple words: Credit creation means banks make more money available for loans, which increases the total money in the economy.

🎯 Exam Tip: Clearly define credit creation as the process of increasing the money supply through lending, and note its impact on circulation.

Question 19. What do you mean by credit ?
Answer: In economics, credit means the ability or capacity of an individual or institution to obtain money or goods in the present with a promise to pay for them in the future. Essentially, it represents the power to advance or take loans. It is built on trust and the expectation of future repayment.
In simple words: Credit in economics means you can get money or things now, by promising to pay for them later.

🎯 Exam Tip: The core concept of credit is about present access to resources based on a future repayment commitment.

Question 21. Write two drawbacks of credit.
Answer: Credit has two main problems. First, it can lead people to spend too much money on things they do not truly need. Second, it can cause businesses to produce more goods than people actually want to buy, leading to too much stock.
In simple words: Credit can make people overspend and businesses make too many products.

🎯 Exam Tip: When discussing economic drawbacks, focus on how they negatively impact individual behavior and market balance.

Question 22. Write two limitations of credit development.
Answer: Two things limit how much credit can grow. One is the cash-reserve ratio, which is how much money banks must keep aside and not lend. The other is how developed the banking system itself is in a country. A strong banking system helps credit grow.
In simple words: Credit growth is limited by how much cash banks must keep and how good the banking system is.

🎯 Exam Tip: Remember that both regulatory requirements (like cash reserve ratio) and infrastructure (banking development) play a crucial role in credit expansion.

Question 23. State two assumptions of credit development.
Answer: Credit development usually assumes two things. First, it is assumed that the cash reserve ratio, which is the amount of money banks must hold, does not change. Second, banks are assumed to always lend out money up to the highest amount they are allowed. This ensures a consistent credit creation process.
In simple words: We assume the cash banks keep does not change, and banks always lend as much as they can.

🎯 Exam Tip: Assumptions simplify complex economic models, so identifying them is key to understanding the underlying theory.

Question 24. "Creation of derived deposits is creation of credit.” who said this ?
Answer: Professor Holm said, "Creation of derived deposits is creation of credit." This means that when banks create new deposits from loans, they are essentially creating more credit in the economy.
In simple words: Professor Holm said that when new bank deposits are made from loans, it's like creating credit.

🎯 Exam Tip: Attributing specific economic statements to their authors demonstrates a deeper understanding of the subject.

Question 25. How does central bank create credit ?
Answer: A central bank creates credit by printing and issuing new paper money. When it puts more currency into circulation, it increases the amount of money available in the economy, which in turn leads to more lending.
In simple words: The central bank makes credit by printing more paper money.

🎯 Exam Tip: Focus on the central bank's unique role in controlling the money supply, primarily through currency issuance.

Question 26. Define primary deposits.
Answer: Primary deposits are the initial amounts of money that people directly deposit into a bank using actual currency. These are fresh cash deposits made by customers, forming the foundation for further credit creation.
In simple words: Primary deposits are the first cash amounts people put into their bank accounts.

🎯 Exam Tip: Understand that primary deposits are distinct from derived deposits, as they are real cash inputs into the banking system.

Question 28. What is the benefit of credit card ?
Answer: A credit card allows people to make payments easily at any time and in any place, without needing to carry physical cash. This offers convenience and security for transactions, making it easier to manage daily expenses.
In simple words: Credit cards let you pay anywhere, anytime, without carrying cash.

🎯 Exam Tip: Highlight convenience and security as the primary benefits of credit cards in modern transactions.

Question 29. What type of monetary policy increases credit creation ?
Answer: A simple and liberal monetary policy encourages more credit creation. This means policies that make it easier for banks to lend money and for people to borrow, such as lower interest rates or reduced reserve requirements.
In simple words: An easy monetary policy helps banks create more credit.

🎯 Exam Tip: Connect "simple and liberal" monetary policy with conditions that make borrowing and lending easier in the economy.

Question 30. What is compulsory for mobile banking ?
Answer: To use mobile banking, you must have a smartphone, an internet connection, and an active bank account. These three things are essential to access banking services on your phone, allowing for transactions on the go.
In simple words: For mobile banking, you need a smartphone, internet, and a bank account.

🎯 Exam Tip: List the fundamental requirements clearly, as mobile banking relies on specific technology and existing financial relationships.

RBSE Class 12 Economics Chapter 18 Short Answer Type Questions (SA-I)

Question 1. Explain the origin of the word 'bank' in brief.
Answer: The word 'Bank' comes from the Italian word 'Banco'. In ancient Italy, money changers would do their business on benches. Another idea is that it comes from the German word 'Banck', which later turned into the English word 'Bank'. This shows banking has roots in simple money exchange practices.
In simple words: The word 'bank' likely came from Italian 'Banco' (benches for money exchange) or German 'Banck'.

🎯 Exam Tip: Briefly explain both common theories for the origin of the word "bank" to provide a complete answer.

Question 2. From where did modern banking business start?
Answer: Modern banking began in Europe. The first known bank, the Bank of Venice, was set up in Italy in 1157. Other early banks included the Bank of Barcelona (1407), Bank of Genoa (1407), Bank of Amsterdam (1609), Bank of Hamburg (1619), and Bank of England (1694). These institutions laid the groundwork for today's global banking system.
In simple words: Modern banking began in Europe, with the Bank of Venice in Italy (1157) being one of the first.

🎯 Exam Tip: Mentioning a few key early banks along with their locations and founding years adds specific detail to your answer.

Question 4. Give two definitions of bank.
Answer: According to Findlay Shirras, a banker is a person, company, or firm that accepts money deposits and uses that money to create credit, paying it back with drafts or cheques. Crowther defined a banker as someone who deals with debts, both their own and others', and creates money by exchanging debts. Banks fundamentally serve as intermediaries in financial transactions.
In simple words: Findlay Shirras said a banker accepts money and creates credit. Crowther said a banker deals with debts and helps create money.

🎯 Exam Tip: When providing definitions, ensure you accurately quote or paraphrase the key ideas of each economist.

Question 5. What is current account ?
Answer: A current account is a type of bank account where money can be deposited and withdrawn many times without giving any prior notice. It is mostly used by businesses for frequent transactions, and payments are usually made by cheque. This account helps manage daily financial flows for commercial entities.
In simple words: A current account lets you take out money anytime, often used by businesses for many transactions.

🎯 Exam Tip: Emphasize the key features of a current account: no withdrawal restrictions, suitability for businesses, and lack of interest payment.

Question 6. What do you mean by cash credit ?
Answer: Cash credit is a short-term loan that banks give to companies. It helps businesses meet their daily money needs or 'working capital'. This loan is usually for a short period and secured against current assets.
In simple words: Cash credit is a short loan for companies to cover their daily business costs.

🎯 Exam Tip: Define cash credit as a short-term facility used by businesses for working capital needs, often secured by inventory or receivables.

Question 7. What do you mean by an overdraft ?
Answer: An overdraft is a special service from banks that allows companies to take out more money than they actually have in their account, up to an agreed limit. This helps them manage their finances when they are short on funds temporarily. It's a short-term borrowing option.
In simple words: An overdraft lets companies withdraw more money than they have in their bank account.

🎯 Exam Tip: Clarify that an overdraft is a short-term borrowing option linked to a current account, allowing withdrawals beyond the available balance.

Question 8. What do you mean by traveler cheque facility ?
Answer: A traveller's cheque facility is offered by banks to customers who travel to other countries. These cheques make their trips safer and more enjoyable, as people can get money at any bank branch abroad without carrying a lot of cash, reducing the risk of theft. They are a form of pre-paid currency.
In simple words: Traveller's cheques help people get money safely while traveling abroad, so they don't need to carry much cash.

🎯 Exam Tip: Explain that traveller's cheques offer a secure way to carry funds while traveling internationally, reducing the risk associated with cash.

Question 10. What is an ATM facility?
Answer: An ATM facility uses automated machines that let customers take out a set amount of cash from their bank accounts. This means they do not have to visit the bank every time they need money. ATMs are computerized and linked to the bank's main system, providing 24/7 access to cash.
In simple words: ATMs are machines that let you take out cash from your account without going to the bank.

🎯 Exam Tip: Define ATM as an automated, computerized machine offering cash withdrawals and other basic banking services anytime, anywhere.

Question 11. What is the locker facility provided by the banks ?
Answer: Commercial banks offer locker facilities where customers can safely store valuable items like jewelry, important property documents, and legal papers. Banks charge a yearly fee for this service. Each locker has two keys: one is held by the customer, and the other by the bank. Both keys are needed to open the locker, ensuring high security.
In simple words: Banks offer lockers to keep valuables safe for a fee. Two keys are needed to open it, one for the customer and one for the bank.

🎯 Exam Tip: Describe locker facilities as secure storage for valuables offered by banks, highlighting the dual-key system for safety.

Question 12. What is a credit card facility?
Answer: Banks now provide credit cards, which give customers a set spending limit. Customers can buy things or pay bills like phone, gas, or electricity without cash, up to this limit. They must pay the bank back within a certain time, or the bank will charge high interest. Credit cards make spending easier but require responsible repayment to avoid debt.
In simple words: Credit cards let you buy things up to a set limit without cash. You must pay back the bank on time to avoid high interest.

🎯 Exam Tip: Explain credit cards as a tool for cashless payments up to a limit, emphasizing the importance of timely repayment to avoid interest charges.

Question 13. What do you mean by internet banking ?
Answer: Internet banking allows customers to do banking tasks online using the internet. After meeting some basic requirements, customers can check their account balance, make payments, shop online, and perform many other banking functions from anywhere. This makes banking convenient and accessible, often available 24/7.
In simple words: Internet banking lets you do bank work online like checking balance or making payments after you sign up.

🎯 Exam Tip: Focus on convenience and accessibility as main features of internet banking, enabling customers to manage finances remotely.

Question 15. Mention the main accounts in which bank accepts deposits.
Answer: Banks mainly accept deposits through five types of accounts. These include Savings Accounts for general saving, Current Accounts for businesses with many transactions, Fixed Deposit Accounts for saving a lump sum for a set period, Pradhan Mantri Jan-Dhan Yojana Accounts for financial inclusion, and Recurring Deposit Accounts for regular small savings. Each account serves different financial needs.
In simple words: Banks take money in Saving, Current, Fixed, Jan-Dhan, and Recurring deposit accounts.

🎯 Exam Tip: Clearly list the common types of deposit accounts and briefly describe their primary purpose for a comprehensive answer.

Question 16. Mention the different methods by which banks advance loans.
Answer: Banks lend money in several ways. One way is through general loans and advances, which are for a specific amount and time. Another is cash credit, where banks give loans using a business's finished goods or property as security. Lastly, an overdraft facility allows current account holders to withdraw more money than they have, up to a certain limit, for short-term needs. These methods cater to various borrower requirements.
In simple words: Banks lend money as regular loans, cash credit (using items as security), and overdrafts (letting you spend more than you have).

🎯 Exam Tip: Distinguish between the different loan types by highlighting their duration, security requirements, and target borrowers.

Question 17. What do you mean by discounting of bill of exchange?
Answer: Discounting a bill of exchange means that commercial banks give a loan to a seller of goods before the bill's payment date. The bank pays the seller less than the full amount of the bill, holding back a fee and interest. When the bill's due date arrives, the bank then collects the full amount from the buyer. This allows sellers to get cash early, improving their cash flow.
In simple words: Discounting a bill of exchange is when a bank pays a seller early for a bill, takes a fee, and then collects the full amount from the buyer later.

🎯 Exam Tip: Explain discounting a bill of exchange as a short-term financing option where a bank provides immediate funds for a future payment, charging a discount fee.

Question 19. What are fixed deposits?
Answer: Fixed deposits are bank accounts where a specific amount of money is deposited for a set period. These accounts typically offer a higher interest rate compared to other savings options. The money can only be withdrawn after the agreed-upon period ends, and the interest rate depends on the amount, the duration, and the bank. It helps people save for a goal with guaranteed returns.
In simple words: Fixed deposits keep your money in the bank for a set time, earning higher interest, and you can only take it out after that time.

🎯 Exam Tip: Key aspects of fixed deposits include a fixed sum, fixed period, higher interest, and withdrawal restrictions, making them suitable for long-term savings.

Question 20. What do you mean by "References given by the banks"?
Answer: "References given by the banks" means banks share information about the financial health of foreign traders with local traders, and vice versa. This sharing of information helps make trade between two countries easier and more secure. It builds trust among trading partners by providing credibility.
In simple words: Bank references mean banks share financial info about traders in different countries to help them trade safely.

🎯 Exam Tip: Explain that bank references facilitate international trade by providing essential financial information and building trust among trading parties.

RBSE Class 12 Economics Chapter 18 Short Answer Type Questions (SA-II)

Question 1. What are a bank's functions as an agent?
Answer: A bank acts as an agent by performing several tasks for its customers. These include paying and collecting cheques and bills, receiving payments on behalf of customers, and buying or selling securities for customers. In short, the bank carries out financial duties as instructed by its clients, simplifying their financial management.
In simple words: As an agent, a bank pays and collects cheques, takes payments, and buys/sells shares for its customers.

🎯 Exam Tip: List specific examples of agency functions like managing payments and securities, showing how banks act on behalf of their customers.

Question 2. What are the general functions of a bank?
Answer: Banks perform several general functions. They help with foreign money exchange, offer loans to the public, provide locker services for valuables, and issue traveller's cheques for safe travel. Banks also collect and share important financial information, handle clearing house functions for cheque payments, and help in creating credit in the economy. These services are vital for both individuals and businesses.
In simple words: Banks do many things like exchanging foreign money, giving loans, offering lockers, and helping with traveller's cheques and credit.

🎯 Exam Tip: Provide a comprehensive list of diverse general functions, showing the broad impact banks have on the economy.

Question 3. Explain demonetization.
Answer: Demonetisation is a policy used by a country's central bank when there is too much illegal money, or 'black money', in the economy, which harms it. The government stops old currency notes from being legal tender and introduces new notes. This makes it impossible for people holding black money in old notes to use it, aiming to bring unaccounted money back into the formal economy.
In simple words: Demonetisation is when a government makes old currency notes invalid and issues new ones to fight illegal money.

🎯 Exam Tip: Clearly define demonetisation as a government policy to invalidate old currency, primarily to tackle black money and financial crime.

Question 4. What is a term - deposit bank account?
Answer: A term-deposit bank account is where customers put a fixed amount of money away for a specific period. The interest rate for this account depends on how long the money is kept, and it is usually higher than other accounts. It suits people who have money they will not need soon. A nominee can be added, but no cheque book is given, and money can only be taken out after the term ends. This encourages disciplined saving.
In simple words: A term-deposit account holds your money for a set time to earn higher interest, and you cannot take it out early.

🎯 Exam Tip: Highlight the fixed amount, fixed period, higher interest, and restricted withdrawal as key characteristics of term-deposit accounts.

Question 5. What is cash fund ratio ? How does cash fund ratio effect credit ?
Answer: The cash fund ratio, often called the Cash Reserve Ratio (CRR), is the percentage of a bank's total deposits that it must keep with the central bank. When this ratio increases, banks have less money to lend, which decreases credit creation. If the ratio decreases, banks have more money to lend, increasing credit creation. It is a powerful tool for central banks to control the money supply.
In simple words: The cash fund ratio is how much money banks must keep aside. If it's high, banks lend less; if it's low, they lend more, affecting how much credit is created.

🎯 Exam Tip: Explain how the cash fund ratio (CRR) directly influences banks' lending capacity and thus the overall credit creation in the economy.

RBSE Class 12 Economics Chapter 18 Essay Type Questions

Question 1. Give details of different accounts opened in commercial banks for accepting
Or
State the various accounts that can be opened in a commercial bank.
Or
Clearly define saving bank account and current bank account.
Answer: Commercial banks offer various types of accounts for customers to deposit money:
(i) **Saving Bank Account:** This account is best for individuals, especially low- and middle-income groups and salaried employees. Money can be deposited and withdrawn easily at any time. Many accounts are opened today with no initial deposit, promoting financial inclusion.
(ii) **Current Account:** This account is suited for big businesses, industrialists, and institutions that conduct frequent transactions. Banks charge a service fee, and there is no limit on daily transactions. It is also known as a demand deposit account, and banks do not pay interest on it.
(iii) **Fixed Deposit Account:** Here, a fixed amount is deposited for a pre-set period, and the interest rate changes with the duration. The bank provides a Fixed Deposit Receipt (FDR) with all details. Customers can get a loan against this receipt or withdraw early with reduced interest. A nominee is required for this account to simplify claims.
(iv) **Recurring Deposit Account:** This account allows customers to deposit a fixed sum of money at regular intervals, usually monthly, for a specific period. It helps individuals save systematically and earn interest on their deposits, similar to a fixed deposit but with regular contributions, suitable for achieving specific financial goals.
(v) **Pradhan Mantri Jan-Dhan Yojana Account:** This scheme helps ordinary citizens open a bank account, often with a zero balance. If the account is used regularly, holders can also get an overdraft facility up to Rs. 5000. This initiative aims to ensure financial access for all, especially in rural areas.
In simple words: Banks offer different accounts like Savings (for daily use), Current (for businesses), Fixed Deposits (for long-term savings with high interest), Recurring Deposits (for regular small savings), and Jan-Dhan accounts (for financial inclusion).

🎯 Exam Tip: For essay questions, define each account type clearly, highlight its target users, and mention its key features and benefits.

Question 2. Mention the different ways in which banks advance loans.
Answer: Commercial banks lend money to their customers in several ways. Banks keep some money as liquid funds and lend out the rest, charging a higher interest rate on loans than they pay on deposits. The main ways banks provide loans are:
(i) **Loans and Advances:** These are specific amounts of money lent for a fixed time, usually secured by collateral. The loan amount is credited to the borrower's account for withdrawal. If the loan is not repaid, the bank can sell the collateral to recover its money, minimizing risk.
(ii) **Cash Credit:** This is a short-term loan for businesses to meet their working capital needs. Banks allow customers to borrow up to a certain limit, which is typically for one year. This facility is often secured by the company's current assets like inventory.
(iii) **Overdraft:** This facility is offered to current account holders, mainly businesses. It allows them to withdraw more money than they have in their account, up to a set limit. This extra withdrawn amount is called an overdraft and depends on the customer's reputation and agreement with the bank, providing flexibility.
(iv) **Discounting Bill of Exchange:** Banks provide early payment for a bill of exchange, which is a payment order for goods. The bank buys the bill at a discounted price (less than its face value) before its due date. When the bill matures, the bank collects the full amount from the buyer. This helps sellers get cash quickly, improving their liquidity.
In simple words: Banks lend money through various methods: fixed loans, cash credit (for business needs), overdrafts (allowing you to withdraw more than you have), and discounting bills (paying early for future payments).

🎯 Exam Tip: Explain each lending method with its specific features, highlighting how banks manage risk and provide financial flexibility to borrowers.