The part of the total deposits which a bank keeps with itself in cash isa)zerob)a small proportionc)a big proportiond)100 percentCorrect answer is option 'B'. Can you explain this answer?

Question

Accepted Answer

Banks keep a small potion mostly 15% of total deposits as cash with themselves which is known as Reserve. The banks keep such a small portion of money as reserve to pay the depositors who might come to withdraw money from their accounts on any day in the bank.

The large portion of the deposits is given as loan on interest to those who need the money. In this way the banks operate their business.

Answer

An asset that the borrower uses as repayment guarantee to a lender is termed as a

Answer

Explanation:

Introduction:
In the banking sector, banks receive deposits from customers in various forms such as savings accounts, current accounts, fixed deposits, etc. These deposits are a liability for the bank as they owe the depositor the amount deposited. Banks are required to maintain a certain proportion of these deposits with themselves in cash or as reserves. This is known as the reserve requirement or cash reserve ratio (CRR).

Definition of Cash Reserve Ratio (CRR):
The cash reserve ratio (CRR) is the percentage of total deposits that commercial banks are required to keep as reserves with the central bank of a country, such as the Reserve Bank of India (RBI) in India. The purpose of maintaining reserves is to ensure the stability and liquidity of the banking system and to meet any unforeseen cash requirements.

Options Explained:
The given options are:
a) Zero
b) A small proportion
c) A big proportion
d) 100 percent

Option a) Zero:
If a bank keeps zero percent of total deposits in cash, it means that the bank does not maintain any reserves and lends out all the deposits. This scenario is highly unlikely and not in line with regulatory requirements. Banks are mandated to maintain a certain level of reserves for stability and liquidity purposes.

Option b) A small proportion:
This option is the correct answer. Banks maintain a small proportion of total deposits as reserves. The specific percentage varies from country to country and is determined by the central bank or regulatory authority. This allows banks to have sufficient cash on hand to meet depositor withdrawals and other cash demands.

Option c) A big proportion:
If a bank keeps a big proportion of total deposits in cash, it means that the bank maintains a high level of reserves. While banks do maintain reserves, keeping a large proportion of deposits as reserves would restrict their lending capacity and profitability. Therefore, this option is not correct.

Option d) 100 percent:
If a bank keeps 100 percent of total deposits in cash, it means that the bank maintains all the deposits as reserves and does not lend out any money. This would make the bank unable to generate profits through lending and would not be in line with the core function of banks, which is to mobilize deposits and provide loans. Therefore, this option is not correct.

Conclusion:
In conclusion, the correct answer is option b) A small proportion. Banks maintain a small proportion of total deposits as reserves to ensure stability, liquidity, and meet cash demands of depositors.

Top Courses for UPSCView all

Current Affairs & Hindu Analysis: Daily, Weekly & Monthly

1 Year Preparation for UPSC CSE

History for UPSC CSE

CSAT Preparation

Lucent For GK

Top Courses for UPSC

Top Courses for UPSC

Related Content

About UPSC

UPSC Preparation Material

NCERT Based Study Material

How to Prepare for UPSC Exam?

Famous Books for UPSC Exam

UPSC Subjects

UPSC Optionals

Other Popular Exams

Company