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Question
State with reason. Whether you ‘agree’ or ‘disagree’ with the following statement:
Commercial bank can credit on the basis of primary deposit.
Solution
Yes, I agree with this statement:
Reasons:
The main source of funds, which is available to commercial banks, is in the form of deposits from the public.
Primary Deposits :
(i) Primary deposits are also known as cash deposits. Such deposits refer to money deposited by the people in the form of cash with the banks. These deposits are withdrawable by the depositors.
(ii) A part of these deposits are kept by the bank, to meet the demand for cash of the depositor. This is termed as minimum cash reserves. The banks are able to do with a very small reserve because all depositors do not withdraw money at the same time
(iii) When a bank grants loan to a borrower, the bank opens a deposit account in the name of the borrower and the money transferred on the account of the borrower creates secondary deposits.
(iv) When the borrower withdraws money from his loan account by a cheque, it is deposited by the payee in some other bank. Other banks again create credit on the basis of fresh deposits received after keeping the required reserves.
Thus, a commercial bank can create credit on the basis of primacy deposits.
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