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Question
Read the given extract carefully and answer the following questions.
| Mr. X wanted to buy an expensive motorcycle for his son but he did not have sufficient money to buy it. He approached a public sector commercial bank for the loan. The bank asked Mr. X to deposit 20% cash of the loan amount and rest 80% of the loan amount was given by the bank. |
- Briefly explain a Commercial Bank.
- What is the regulation of consumer credit in selective credit control?
- Name the bank which controls all the commercial banks and financial institutions in the country.
Solution
- Commercial bank is defined as an organisation that accepts demand deposits and uses the deposited money to lend to the general public.
- The regulation of consumer credit involves laying down rules regarding payments and maintaining maximum number of instalment credits for the purchase of specified durable consumer goods.
Thus, consumer credit employs two aspects:
- Minimum down payment, and
- Maximum period of payment.
- Central Bank (Reserve Bank of India in case of India) controls all the commercial banks and financial institutions in our country.
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RELATED QUESTIONS
Explain the credit creation role of commercial banks with the help of a numerical example.
______ is the main source of money supply in an economy.
The creation of ______ is called credit creation.
Banks are able to create credit many times more than initial deposits through ______.
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Access to adequate and timely credit at affordable rates is critical for the rural poor to alleviate high cost debt and invest in livelihood opportunities. Despite the Government of India's best efforts, financial inclusion of the rural poor has been beset with multiple challenges. Lack of adequate banking infrastructure and human resources in rural areas, unplanned expansion leading to unviable bank branches and low levels of financial literacy amongst the rural populace have been some of the key challenges.
The most vulnerable communities, who often had no formal credit history or ability to provide collateral, have often been the worst affected. Inability to access loans from banks meant that the poorest had to resort to moneylenders for loans at unreasonably high rates of interest that invariably led them into a toxic debt trap.
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Community Based Repayment Mechanisms (CBRMs) have been institutionalised at branches involved in financing SHGs to monitor and ensure timely repayment of loans by SHGs. The number of SHGs with outstanding bank loans stands at nearly 5 million today, implying that the program has brought formal banking services to over 50 million women.
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| Column A | Column B | ||
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| (ii) | A deposit created by bank when loan is granted | B. | Demand deposits |
| (iii) | Deposits payable by bank on demand | C. | Initial deposit |
| (iv) | Deposits the amount of which can be withdrawn only after a fixed period of time | D. | Secondary deposit |
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To ensure that the citizens of the country have faith in the currency, the currency is issued by:
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Assertion (A): Credit Creation comes to an end when total cash reserves become equal to the initial deposits.
Reason (R): The value of money multiplier is determined by Legal Reserve Ratio (LRR).
Match the following:
| Column I | Column II | ||
| A. | Formula of Money Multiplier | (i) | Inverse |
| B. | Money multiplier = 4 | (ii) | Money multiplier = 10 |
| C. | Relationship between LRR and money multiplier | (iii) | LRR = 0.25 |
| D. | LRR = 0.1 | (iv) | `1/"LRR"` |
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