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Question
State the differences between a loan and an overdraft.
Solution
| Loan | Overdraft |
| Opened against the borrower's name, with loans available for short, medium, and long maturities. | When an account holder requires credit in excess of his or her deposit amount, he or she is allowed to borrow the excess amount for a short period. |
| This function is available to all types of account holders. It charges interest on the total borrowed amount. | It is distributed to current account holders. The bank charges interest only on the extra amount. |
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RELATED QUESTIONS
What are Commercial banks?
What are current accounts?
______ deposits earn very low rate of interest on it.
With reference to the secondary functions of a Commercial Bank, explain the general utility function.
Which account holder gets Overdraft facility?
Explain the term bank overdraft.
Which of the following statements are true?
- A bank collects money from those who have surplus funds and lends this money to those who require it.
- Commercial banks do not transfer funds from one place to another.
- The principle objective of commercial banks is to earn profit.
Identify the correct sequence of alternatives given in Column II by matching them with respective terms in Column I.
| Column I | Column II | ||
| A. | Function of Commercial bank | (i) | Initial deposits × `1/"LRR"` |
| B. | Money multiplier | (ii) | The difference between market value of the security and the amount of loan. |
| C. | Total money creation | (iii) | Acceptance of deposits |
| D. | Margin requirement | (iv) | `1/"LRR"` |
Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
Assertion (A): Commercial Banks keep only a fraction of deposits as Cash Reserves and use the remaining deposits for given loans, etc.
Reason (R): All the depositors of Commercial Banks do not approach the banks for withdrawal of money at the [iame time and also they do not withdraw the entire amount in one go.
Compare the rate of interest given to such an account to that of a Current Account and a Fixed Deposit.
