Bank: Origin, Meaning, Functions and Importance Objective Type Questions (1 Mark)

Question 1.
The name of the account where the money is repayable after a fixed duration is:
(a) Fixed Deposit Account
(b) Recurring Deposit Account
(c) Saving Account
(d) Current Account
Answer:
(a) Fixed Deposit Account

Question 2.
The scheme of the recurring deposit account was started in the year:
(a) 1960
(b) 1962
(c) 1964
(d) 1966
Answer:
(c) 1964

Question 3.
Sale and purchase of foreign currency is done by:
(a) Reserve Bank of India
(b) State’ Bank of India
(c) Punjab National Bank
(d) Foreign Exchange Bank
Answer:
(d) Foreign Exchange Bank

Question 4.
In ……….. account, the customer may withdraw money as and when he likes.
(a) Saving Account
(b) Current Account
(c) Fixed Deposit Account
(d) Recurring Deposit Account
Answer:
(b) Current Account

Question 5.
The word ‘Bank’ has been derived from the Italian word ………
(a) Bango
(b) bingo
(c) Banking
(d) Bingo
Answer:
(a) Bango

Bank: Origin, Meaning, Functions and Importance Definite Answer Type Questions (1 Mark)

Question 1.
Who is played a very important part in the economic development of all the nations of the world?
Answer:
Banking.

Question 2.
Write the name of the bankers of the banks. (UP 2013)
Answer:
Reserve Bank of India.

Question 3.
In which year Reserve Bank of India was set up?
Answer:
1964.

Question 4.
Name the bank which has made an important contribution in the field of giving loans for industrial finance in India.
Answer:
Commercial Bank.

Question 5.
Write the name of Present Central Finance Minister of India.
Answer:
Shree Arun Jethali.

Bank: Origin, Meaning, Functions and Importance Very Short Answer Type Questions (2 Marks)

Question 1.
Give two agency functions of a bank.
Answer:
Two agency function of a bank is as follows:

• Collecting Customer’s Fund: The bank collects the funds of its customers from other banks and credits them to their accounts.
• Payment of Premium: The bank pays to the insurance companies on behalf of its customers. It may also pay certain bills of the customers as per their activities.

Question 2.
What is an exchange bank?
Answer:
Exchange banks also function as a commercial bank but the only difference is that their main function is the sale and purchase of foreign currencies. In international trade, the main problem is of payment, and without foreign exchange, the business is not possible. Then the exchange bank comes to the rescue of the exporter and the bank purchases the bills from the exporter and makes the payment by discounting the bills.

Question 3.
What are the main functions of a bank?
Answer:
Main functions of a bank are as follows:
1. Acceptance of Deposit: Acceptance of deposits is a very important function of a modern bank. The bank collects the surplus balance of the individuals and of the firms by giving facilities for opening different deposit accounts. Bank gives some interest on the deposits.

2. Advancing of Loans: The deposits received by the banks are not allowed to lie idle in the cash box of the bank. After keeping certain cash reserves, the balance is given by the bank to the needy borrowers in the form of loans and advances.

3. Discounting of bills: This is another type of lending which is very popular with modern banks. If the holder of an exchange bill needs money immediately, he can get it discounted by the bank. After deducting its commission, the bank pays the present price of the bill to the holder.

Bank: Origin, Meaning, Functions and Importance Long Answer Type Questions (8 Marks)

Question 1.
How is credit created by a Bank? (UP 2008, 18)
Answer:
Creation of Credit by Bank. Grating of loans and advances is important to function of the bank. But the process by which the banks grant loans and advances has special significance for the modern economy. Money is said to be created when the banks, through their lending activities, make a net addition to the total supply of money in the economy.

The customers deposit their savings (cash or cheques) in their accounts in the bank. These deposits convert currency money into deposit money. The deposit money provides funds, out of which the bank makes loans and advances to its customers. The bank knows by experience that all these primary deposits are not going to be withdrawn by the depositors at any one particular time. So the bank, after keeping a small percentage of these deposits in cash, uses the balance for making loans and advances to the customers. The primary deposit which is kept in cash by the bank is known as Cash Reserve.

After keeping a small percentage of deposits as Cash Reserve, the balance percentage of deposits are given as loans and advances to the persons in need. When the borrower is granted loan by the bank, the loan money is not paid to the borrower in cash but is credited to his deposit account. The borrower, however, can withdraw the entire loan money either at once or in small instalments according to his requirements. Thus, the formation of credit takes place. We can explain it with an example.
Example: Let us suppose that the minimum Cash Reserve observed by the bank is 10% and a person deposits Rs. 2,000 in the bank.

As the minimum Cash Reserve is 10%, the bank will keep Rs. 200 (10% of Rs. 2,000 as the Cash Reserve and the balance Rs. 1800 (2000 <$E-> 200) will be given by the bank as loan or advance. As already pointed out, the bank does not pay the loan amount in cash but the loan money is credited to borrower’s deposit account. Now the bank will keep 10% as Cash Reserve of the loan amount which will amount to Rs. 180 (i.e., 10% of Rs. 1,800) and the balance of Rs. 1620 (i.e., 1800 < $E- > 180) can be given by the bank as loan or advance. Again the bank will keep 10% Cash Reserve amounting to Rs. 162 (i.e., 10% of Rs. 1620) and the balance of Rs. 1458 (i.e., 1620 <$E- > 162) can be given as loan or advance. In this way, the process of multiple credit creation will continue.

In the above example, the minimum Cash Reserve Rate is 10%. The initial deposit of Rs. 2,000 will result in creating derivative deposits of Rs. 1800. Thus, there is a ten times increase in derivative deposits on the basis of the original excess reserve of Rs. 1800. The bank has a limited amount but by creating credit, it increased the amount to a large extent. Banks are helpful in fulfilling the needs of the country by creating credit which increases the economical and industrial development of the country.

Thus, we can say that banks do not create credit by only accepting deposits but also create credit by giving loans and advance, a loan is not given in cash but is deposited in the account of the borrower. So we can say that loans create deposits and deposits create loans.

Question 2.
How a saving account is opened with a bank? Write its advantages.
Answer:
Saving Bank Account is meant for the middle class and low-class income group persons for developing the habit of saving among them.
A person wishing to open a Saving Bank Account has to fill in the form and make a declaration therein that he has read the rules of Saving Bank Account. He has also to give specimen signature. Then the amount is deposited in the account by the account-holder and the same is entered in the passbook which is handed over to the depositor. If the account-holder has opted for cheque facility then a cheque book is also issued to the account-holder.

Advantages of Opening Saving Account: Following are the advantages of this account:

1. Encourage Savings: This account helps the people to develop the habit of saving money.
2. Feeling of Economy: When a person feels the importance of saving, he tries his best for the proper and necessary utilization of money. This avoids extravagance.
3. Profitable to Low Income Group: People belonging to low-income group finds this account much profitable.
4. Facility to Minors: They can also open an account and deposit their savings in it.
5. Earning of Interest: The person depositing his savings get interested in his deposits.

Question 3.
How many types of account can be open in a bank? (UP 2008)
Answer:
The following types of accounts can be opened in a bank:
1. Fixed Deposit Account: The term fixed deposit means deposits repayable after the expiry of a certain period which ordinarily varies from one year to five years. The rate of interest is higher in a fixed deposit account in comparison to other deposits. Money can also be borrowed against the security of fixed deposit.

2. Current Account: This account is generally opened by businessmen. Under this account, the customer can deposit or withdraw money as and when he likes. No Interest is allowed by first-class banks on such accounts.

3. Savings Bank Account: Such account is meant for the middle class and low-class income group persons. The main objective of such account is to develop the habit of savings. When these small savings are pooled, it forms a large capital which can be used for the economic growth of the country.

4. Home Safe Deposit Account: Such account is a very good means of encouraging thrift among persons having small income or among children. These accounts carry only a very small rate of interest.

5. Recurring Deposit Account: Any person can open this account in his personal name or joint names and in case of minor under the guardianship of someone. The term of account depends upon the wish of an account holder, which varies from 1 year to 7 years. The amount to be deposited every month in the account should be Rs. 10 or in multiples thereof but to the maximum limit of Rs. 500 per month.

Question 4.
List the precautions adopted or information gathered by the bank before opening an account.
Answer:
The bank must be very careful and gather certain information before opening an account. These precautions could be of following nature:
1. Minor: A person after attaining the age of 18 years becomes major. Prior to this age, he is minor. As per the law, a minor cannot enter into any contract. For the contracts entered into by the minor, no legal liability can be cast upon him. There is nothing wrong in dealing with a minor but if a bank provides overdraft facility to a minor, it cannot take any legal action to recover in the name of the minor, but the account should be operated by the guardian.

2. Mad Person: No contract can be entered into with a person who is not of sound mind. Hence, no account should be opened of the person who is of unsound mind, but if the account has already been opened, the bank should stop the payments of the cheques issued by him and suspend all the transactions in relation to his account.

3. Married Lady: A lady who is married, is free to open the account but the bank should be very judicious in providing loans to her because her husband cannot be made responsible for the loans taken by her. The bank should advance any loan but only by taking some guarantee or if the lady has some assets in her name.

4. Agent: The account can also be opened in the name of an agent. Before opening the account, the bank should verify the rights of the agents.

5. Partnership Firm: Banks, before opening the account of a partnership firm should collect some information, such as partnership deed, soap registration or sale tax registration, nature of the business, names and addresses of the partners and signatures of the partners having right to operate the account.

6. Joint Stock Companies: The bank should obtain the following information before opening the account of joint-stock companies:

• The right of directors, managers and officers of the company as mentioned in articles of association and memorandum of association.
• The copy of the resolution under which the company has appointed them as their bankers.
• Certificate of commencement of business should also be inspected by the bank.

7. Trust: In case the account to be opened is that of the trust, the bank should study the trust because it contains the rights of the trustees. Generally, the deed mentions the rights regarding operation of the account, limit, of loan etc.

8. Joint Account: While opening a joint account, the banker must obtain definite instructions as to how the account is to be operated. Whether all of them shall operate the account or delegate the authority to one should also be cleared.