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The term ‘narrow banking’ is best described as :
- a)banks acting only as payment banks
- b)banking by non-banking financial companies
- c)limited areas of operation by banks
- d)banks lending only to risk free sectors
Correct answer is option 'D'. Can you explain this answer?
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The term ‘narrow banking’ is best described as :a)banks ac...
A ‘Narrow Bank’ can be defined as the system of banking under which a bank places its funds in risk-free assets with maturity period matching its liability maturity profile, so that there is no problem relating to asset liability mismatch and the quality of assets remains intact without leading to emergence of sub-standard assets.
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The term ‘narrow banking’ is best described as :a)banks ac...
Narrow Banking Explained
Narrow banking is a financial concept wherein banks limit their operations primarily to low-risk activities. This model focuses on safeguarding deposits and ensuring liquidity, while avoiding riskier lending practices that could endanger depositor funds.
Key Characteristics of Narrow Banking:
- Risk-Free Lending: Narrow banks typically lend only to sectors considered risk-free, such as government securities and low-risk financial instruments. This approach minimizes the chances of defaults and protects depositors' money.
- Safety of Deposits: By restricting their lending activities to secure investments, narrow banks aim to provide a high level of safety for depositors, thus maintaining public confidence in the banking system.
- Focus on Payments: While primarily concerned with low-risk lending, narrow banks can also act as payment banks, facilitating transactions and payment services without engaging in traditional lending practices.
Contrast with Traditional Banking:
- Broader Lending Scope: Traditional banks engage in a wide range of lending activities, including loans to businesses and personal loans, which involve higher risk and potential for higher returns.
- Risk Management: Traditional banks manage risks through diversification and credit assessments, whereas narrow banks avoid risk by limiting their lending to safer sectors.
Conclusion:
The concept of narrow banking emphasizes a conservative approach to banking, focusing on stability and security over profit maximization. This model is particularly relevant in discussions about financial regulation and the stability of the banking system, making it an important topic for exams like UPSC.
Narrow banking is a financial concept wherein banks limit their operations primarily to low-risk activities. This model focuses on safeguarding deposits and ensuring liquidity, while avoiding riskier lending practices that could endanger depositor funds.
Key Characteristics of Narrow Banking:
- Risk-Free Lending: Narrow banks typically lend only to sectors considered risk-free, such as government securities and low-risk financial instruments. This approach minimizes the chances of defaults and protects depositors' money.
- Safety of Deposits: By restricting their lending activities to secure investments, narrow banks aim to provide a high level of safety for depositors, thus maintaining public confidence in the banking system.
- Focus on Payments: While primarily concerned with low-risk lending, narrow banks can also act as payment banks, facilitating transactions and payment services without engaging in traditional lending practices.
Contrast with Traditional Banking:
- Broader Lending Scope: Traditional banks engage in a wide range of lending activities, including loans to businesses and personal loans, which involve higher risk and potential for higher returns.
- Risk Management: Traditional banks manage risks through diversification and credit assessments, whereas narrow banks avoid risk by limiting their lending to safer sectors.
Conclusion:
The concept of narrow banking emphasizes a conservative approach to banking, focusing on stability and security over profit maximization. This model is particularly relevant in discussions about financial regulation and the stability of the banking system, making it an important topic for exams like UPSC.
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The term ‘narrow banking’ is best described as :a)banks acting only as payment banksb)banking by non-banking financial companiesc)limited areas of operation by banksd)banks lending only to risk free sectorsCorrect answer is option 'D'. Can you explain this answer?
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