Unit Test (Solutions): Banks and the Magic of Finance

M.M: 30
Attempt all questions.

• Question numbers 1 to 5 carry 1 mark each.
• Question numbers 6 to 8 carry 2 marks each.
• Question numbers 9 to 11 carry 3 marks each.
• Question numbers 12 & 13 carry 5 marks each.

Q1. Fill in the blank:
 A __________ is a financial institution that collects money from people in the form of deposits and lends money to people or borrowers as loans. (1 Mark)
Ans: Bank

Q2. Which of the following bank accounts does not earn interest? (1 Mark)
 (i) Savings Account
 (ii) Current Account
 (iii) Fixed Deposit Account
 (iv) All accounts earn interest
Ans: (ii)
Explanation: A current account is for businesses and traders who often make and receive payments, and it does not earn interest.

Q3. What does RBI stand for? (1 Mark)
Ans: Reserve Bank of India

Q4. What is a cheque? (1 Mark)
Ans: A cheque is a paper instrument that allows you to pay someone directly from your bank account.

Q5. In which year was the UPI launched in India? (1 Mark)
Ans: 2016

Q6. What is financial infrastructure? Explain briefly. (2 Marks)
Ans: Financial infrastructure is a network of banks, payment systems, stock markets, and other financial institutions. It helps people, businesses, and government facilitate financial transactions and manage money.

Q7. Explain the difference between debit and credit in a bank passbook. (2 Marks)
Ans: Debit means taking money out of an account, which represents expenses. Credit means receiving money in an account, which represents income. The passbook keeps a record of all these receipts and payment transactions.

Q8. What was the purpose of the Pradhan Mantri Jan Dhan Yojana launched in 2014? (2 Marks)
Ans: The Pradhan Mantri Jan Dhan Yojana aimed to give every Indian, especially low-income earners, access to a bank account. It required no minimum balance or fees, and since then, over 50 crore accounts have been opened.

Q9. Explain how compound interest works with an example. (3 Marks)
Ans: Compound interest means earning interest not just on the original amount but on the amount including interest earned in previous years. For example, if you deposit ₹1,000 in your account with 6% interest each year, at the end of the first year, you will have ₹1,060. In the second year, you earn interest on ₹1,060 (not just ₹1,000), which gives you ₹63.60 as interest. This process is called compounding and helps money grow exponentially over time.

Q10. Describe the three types of bank accounts. (3 Marks)
Ans: The three types of bank accounts are:
- Savings Account: This account is for individuals who save regularly and earn interest on such savings. It has limits on how often money can be withdrawn each month.
- Current Account: This account is for businesses and traders who often make and receive payments. It does not earn interest and generally has no limits on deposits or withdrawals.
- Fixed Deposit Account: This is a one-time deposit kept for a fixed period, like 3 or 5 years. After that time, the bank returns the original amount plus interest, which is usually higher than in a savings account.

Q11. What is a stock exchange, and what happens there? Explain with reference to India. (3 Marks)
Ans: A stock exchange is a marketplace where financial securities like stocks are traded. The actual buying and selling of shares takes place at the stock exchange. In India, the Bombay Stock Exchange (BSE) was established in 1875 and is one of the oldest stock exchanges in the world. Back then, share transactions were conducted manually using paper tickets, but in the modern world, these have been replaced by digital transactions using advanced computers and other devices.

Q12. How do banks make money? Explain with an example. (5 Marks)
Ans: Banks make money through the difference between the interest rates they pay to depositors and the interest rates they charge borrowers. Banks pay lower interest rates on savings deposits to depositors and charge higher interest rates on loans to borrowers. This difference in interest rate is a source of income for banks. For example, Anand deposits ₹200 in his bank account. The bank offers an interest rate of 2% on his savings. The bank lends ₹200 to Shreya and charges an interest rate of 5%. Shreya repays ₹10 (5% of ₹200) as interest along with the original loan amount of ₹200, which totals ₹210. The bank pays ₹4 (2% of ₹200) to Anand as interest. Therefore, the bank earns ₹210 - ₹204 = ₹6 as profit. It is important to note that banks have reserve money and do not lend all deposits as loans.

Q13. What is UPI and how does it work? Explain its benefits. (5 Marks)
Ans: UPI stands for Unified Payments Interface. It is a fast and secure digital payment system that enables the transfer of funds. The National Payments Corporation of India (NPCI) launched UPI in 2016. UPI works through a simple process. For example, when Kumar scans Piyush's QR code using a payment application on his phone and enters his UPI PIN and the amount to be sent, the application sends a payment request to Kumar's bank. Kumar's bank forwards the request to NPCI, which decrypts the request, verifies the user's UPI PIN, and processes the transfer. The funds are then received by Piyush's bank, and Piyush receives the payment in his bank account. 
The benefits of UPI include allowing effortless digital transactions, supporting cashless transactions during the COVID-19 pandemic when social distancing was essential, and being accessible to everyone due to its user-friendly design in multiple languages. India's UPI system has been accepted by countries like Nepal, the United Arab Emirates, France, Sri Lanka, Bhutan, and Mauritius, making it truly India's gift to the world of payment systems.