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NIOS Class 10 Economics Chapter 15 Banking and Credit
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Banking and Credit
MODULE 5: MONEY, BANKING AND INSURANCE
TEXTBOOK QUESTIONS (SOLVED)
INTEXT QUESTIONS 15.1
Q.1. Name an institution in which someone can deposit surplus money.
Ans. Commercial Banks.
Q.2. Name any two purposes which a loan can be sanctioned by a bank.
Ans. (i) To start business.
(ii) To purchase a house.
INTEXT QUESTIONS 15.2
Q.1. A bank received a deposit of ₹ 200. It gave a loan of ₹ 180 to a borrower. What is the cash reserve ratio?
Ans. Cash Reserve Ratio = 20/200 × 100 = 10%
Q.2. In the above question, find out the amount of
(a) Primary deposit.
(b) Secondary deposit.
(c) Total deposit.
Ans. (a) ₹ 200.
(b) ₹ 180.
(c) ₹ 380.
Q.3. Define Credit.
Ans. Credit may be defined as a contractual agreement in which a borrower receives something of value now or at present and agree to repay the lender at some later date or future.
INTEXT QUESTIONS 15.3
Q.1. Give one example of a commercial bank, cooperative bank and development bank.
Ans. (i) Commercial Bank: State Bank of India.
(ii) Cooperative Bank: Agricultural Banks.
(iii) Development Bank: IDBI.
Q.2. For which activities do the cooperative banks provide credit both in rural and urban areas. Give two examples of each.
Ans. (i) In Rural Areas: Cooperative Banks provide credit for farming, cattle, fishery etc.
(ii) In Urban Areas: Cooperative banks provide credit for self-employment activities, small-scale industry, purchase of durable goods and personal loans.
Q.3. What is the head of banking system in India?
Ans. Reserve Bank of India.
Q.1. Explain any two functions of a bank.
Ans. Two Functions of a Bank: Two functions of a bank have been explained below:
(i) Acceptance of Deposits: This is an important primary function of the commercial banks. The commercial banks accept deposits from individuals, business firms and other institutions. This is economically useful function in the sense that it helps in the mobilization of savings for production purposes. The commercial banks accept deposits in several forms according to the requirements of different sections of the society.
(ii) Advancing Loans: Extending loans is another important primary functions of the commercial bank. It gives loans in several ways. Some of the ways of giving loans have been discussed below:
(a) Ordinary Loans: Here, the commercial banks advance loans against some easily marketable tangible securities to safeguard the interest of depositors. The amount of money is, however, not given to the borrowers in cash, rather it is credited to their accounts. The borrowers can withdraw it in the manner they like.
(b) Overdraft: Overdraft facility is given to those customers who maintain a current account with the bank. Under this system bank honour cheques issued by the customers in excess of the balance in accounts. This facility is generally given to respectable and reliable customers for a short period.
(c) Discounting of Bills: In modern business, a few people can wait for the payment of the bills of exchange, until they mature. Banks discount the bills after charging the interest for the period and the of collection. Practically, discounting of bills is lending for short periods.
Q.2. What is credit? How does a bank create credit?
Ans. Credit: Credit means claims to receive payments from borrowers.
Credit Creation by a Bank: A bank creates credit by keeping a fraction of total deposit and lending the balance to the people who approach the bank for loan and opening their account. The fraction of the deposit kept by the bank is known as cash reserve ratio With this act of the bank, the process of credit creation starts. In the process of credit creation, two types of deposits are recorded. The first one is called primary deposit. Primary deposit is the initial increase in the bank deposit resulted when the bank receives the new deposit from public. The second type of deposit is called secondary deposit. It is the deposit created due to the loans given by the bank in each round. Credit creation is possible due to the increase in the secondary deposits:
The credit creation capacity of a bank depends on the cash reserve ratio. The higher the cash reserve ratio, the lower the credit creation capacity. To calculate the amount of total credit creation, we apply the following formula:
Total Credit = Initial increase in deposit
Q.3. What are the different types of Banks in India?
Ans. Different Types of Banks in India: In India, there are following types of banks:
(i) Reserve Bank of India.
(ii) Commercial Banks.
(iii) Cooperative Banks.
(iv) Departmental Banks.
Q.4. Write short note on the following:
(ii) Cooperative Banks.
(iii) Commercial Banks.
Ans. RBI: RBI is the head of the banking system in the country (India). It means that all other banks such as commercial banks, cooperative banks, development banks etc. follow the rules and regulations made by RBI. Its Head-quarter is in Mumbai. RBI’s main function is to issue currency notes. The paper currency of various denominations such as ₹ 2, 5, 10, 50, 100, 500 and 1000 are issued by RBI. The currency notes issued by RBI bear the signature of the Governor of RBI. The notes bearing the signature of the Governor of RBI is approved by the government so that they can be used for buying and selling goods or services.
It may be mentioned here that one rupee note and coins as well as coins below one rupee are issued by Ministry of Finance, Government of India.
Other functions of Reserve Bank are as follows:
(a) Banker to the Government.
(b) Banker’s Bank.
(c) Credit Control.
(ii) Cooperative Banks: Cooperative banks are run by cooperative societies. They are governed by the law of state in which they are operating. Such banks are of two types- (a) Agricultural (or Rural) and (b) Non- agricultural (or Urban).
(a) Agricultural Banks: These banks provide credit for farming, cattle, fishery etc.
(b) Non-agricultural Banks: These banks provide credit for self-employment activities, small-scale industry purchase of durable goods such as television, refrigeration etc. and personal finance.
(iii) Commercial Banks: Commercial banks are those banks which accept the deposits from public and grant loans to people for purchasing houses, furniture, refrigerators, televisions, washing machines. They also keep valuable materials by providing locker facility. They also provide services such as issuing draft, transfering money. Their aim is to earn profit.
SOME IMPORTANT QUESTIONS FOR EXAMINATIONS
VERY SHORT ANSWER TYPE QUESTIONS
Q.1. What is relationship between money and banking?
Ans. Money and Banking go together. They are complementary to each other.
Q.2. Why do people make a visit to a bank?
Ans. People make a visit to a bank for various purposes such as to deposit their surplus money, to withdraw money from their accounts in order to make payments in cash, to take loan etc.
Q.3. What type of institution is a bank?
Ans. Bank is a financial institution which accepts money from public as deposits and gives loan to them.
Q.4. State the medium through which money can be withdrawn from a bank.
Ans. Money can be withdrawn from a bank through cheques, drafts order or otherwise (ATM).
Q.5. State two functions of a bank.
Ans. (i) Accepting deposits from public.
(ii) Giving loans.
Q.6. Bank accepts deposits from whom?
Ans. Bank accepts deposits from public which includes individuals, groups, business firms etc.
Q.7. Why does a bank issue cheque books to its deposits?
Ans. A bank issues cheque books to its depositors to withdraw money from the bank for making payments to any party through the bank.
Q.8. What special point does a bank keep in mind while granting loans?
Ans. While granting loans, a bank takes into the consideration the ability to repay the loan in future.
Q.9. What do you mean by credit creation by a bank?
Ans. Credit creation by a bank means expanding its deposits through borrowings.
Q.10. Do all the depositors who make deposits in the banks withdraw all their deposits at once?
Ans. No. Mostly people withdraw a smaller amount from their deposits whenever they require and leave the rest of amount with the bank.
Q.11. Who decides the percentage of total deposits to be kept as cash by the banks?
Ans. It is decide by banking authority of the country.
Q.12. What is cash reserve ratio?
Ans. Cash Reserve Ratio is the fraction of the total deposits to be kept in the form of cash.
Q.13. A bank has accepted the deposits of ₹ 2000 from a person? How much loan can a bank grant of cash reserve ratio is 10%.
Q.14. What is primary deposit?
Ans. Primary deposit is the initial increase in the bank deposit resulted when the bank receives a new deposit from public.
Q.15. What are secondary deposits?
Ans. Secondary deposits are those deposits which are created due to loans given by the bank in each round.
Q.16. What are total deposits?
Ans. Total deposits are the sum-total of primary deposits and secondary deposits.
Q.17. Write down the formula for calculating total credit.
Ans. Initial increase
Q.18. Calculate total credit with the help of following data:
(i) Initial increase in deposit = ₹ 100
(ii) Cash Reserve Ratio = 20%
Ans. Total credit = Initial increase in
Q.19. A makes deposits of ₹ 100 with a bank. Cash Reserve Ratio is 20%. B visits the bank for loan. Upto which amount can the bank given loan to him?
Ans. The bank can grant loan to B upto ₹ 80 (100-20).
Q.20. A man deposits ₹ 1000 with a bank. Cash Reserve Ratio is 20%. Calculate total credit which can be created by the bank.
Ans. Total credit creation
Q.21. On what factors does the credit creation capacity of a bank depend?
Ans. Credit creation capacity of a bank depends on the following two factors:
(i) Increase in initial deposit.
(ii) Cash Reserve Ratio.
Q.22. Total credit creation by a bank is ₹ 5,000 on the basis of initial deposit of ₹ 1000. Calculate cash reserve ratio.
Q.23. When Cash Reserve Ratio increases, then why the credit creation decrease?
Ans. Because with the increase in cash reserve ratio, the bank will have to keep more cash to make payments to public and accordingly few amounts will be available for giving loans. So less credit will be created.
Q.24. Who issue one rupee note?
Ans. One rupee note is issued by Ministry of Finance, Government of India.
Q.25. How is Reserve Bank of India a banker of government?
Ans. Reserve Bank of India is a banker’s of government in the following ways:
(i) In India, both Central and State Government deposits their money in RBI.
(ii) Both take loan from RBI.
Q.26. Is Canara Bank in public sector or in private sector?
Ans. Canara Bank is in public sector.
Q.27. Where is the head office of RBI?
Ans. The head office of RBI is in Mumbai.
Q.28. Which issues note of ₹ 100 in India?
Ans. Reserve Bank of India.
Q.29. Whose signature is there on the note of ₹ 100?
Ans. Signature of the Governor of RBI.
Q.30. In which form does a bank increase its deposits?
Ans. A bank increases his deposits by credit creation through loans.
Q.31. Out of State Finance Corporation and HDFC, which bank is a development bank?
Ans. Finance Commission.
Q.32. Name the banks run by Cooperative Societies.
Ans. Cooperative Bank.
Q.33. How many types of deposits are recorded in the process of credit creation?
Ans. Two types of deposits-
(i) Primary Deposits.
(ii) Secondary deposits.
Q.34. Credit creation is possible due to increase in what type of deposits?
Ans. Due to increase in secondary deposits.
Q.35. Complete the following table when Cash Reserve Ratio is 20%.
Q.36. What is the name of Central Bank in our country?
Ans. Reserve Bank of India.
Q.37. Commercial Banks and Cooperative Banks follow the rules and regulations of which institution?
Ans. Reserve Bank of India.
Q.38. From which bank, Central Government and State Governments take loans?
Ans. From RBI.
Q.39. With which bank do centre and state governments deposit their money?
Ans. Central and State Government deposit their money with RBI.
Q.40. In which sector (Private/Public) are the following banks?
(i) Punjab National Bank.
(ii) YES Bank.
Ans. Punjab National Bank is in public sector whereas “YES Bank” is in private sector.
Q.41. What is the main objective of Commercial Banks?
Ans. The main objective of Commercial Banks is to earn profit.
Q.42. Write down any two services rendered by commercial banks.
Ans. (i) Transfer of Money.
(ii) Issuing Drafts.
Q.43. For what do the Cooperative Banks provide credit in rural areas?
Ans. In rural areas the Cooperative Banks provide credit for farming, cattle, fishery etc.
Q. 44. For what do the Cooperative Banks provide credit in urban areas?
Ans. In urban areas, the Cooperative Banks provide. Credit for self-employment opportunities, small-scale industry, purchase of durable goods such as television, refrigerator etc. and personal finance.
Q.45. How do banks provide security to the valuable materials?
Ans. Banks provide security to the valuable materials by providing locker facility.
Q.46. Why do people borrow money from the bank?
Ans. People borrow money from the banks to buy something today or do some business for which there is not enough money with them at present.
Q.47. Out of primary deposits and secondary deposits, which deposits indicate the public deposits with the bank.
Ans. Primary deposits.
SHORT ANSWER TYPE QUESTIONS
Q.1. Write down the name of Central Bank of India. Also write down its function.
Ans. Name of Central Bank of India is Reserve Bank of India.
Functions of Reserve Bank of India: Following are main functions of RBI:
(i) Issue of Currency Notes: Main function of RBI is to issue currency notes. The paper currency of various denominations such as ₹ 2, 5, 10, 100, 500 and 1000 are issued by RBI. These currency notes bear signature of the Governor of RBI. They are approved by the Government of India. One rupee note and coins are issued by Ministry of Finance, Government of India.
(ii) Banker to the Government: It acts as a banker to the government. In India both central and state governments take loan from RBI and deposit their money with RBI.
Q.2. Explain RBI’s function of a banker to government.
Ans. As a banker to government, RBI performs following functions:
(i) It accepts the deposits of both central and governments.
(ii) It gives loans to both central and state governments.
(iii) It sells the treasury bills of the governments.
(iv) It gives advice to the government on the financial matters.