Very Short Question and Answers - Loan Activities of Banks

Banks keep only a fraction of deposits as reserves and lend the remaining to borrowers, thus channelising savings to investment.

For safety,

Savings account, current account, and fixed (term) deposit.

CRR is the fraction of total deposits that banks are required by the RBI to keep as cash reserves and not lend out.

It is the process by which banks expand the money supply by lending deposits that return as new deposits, enabling further lending.

Loans given by banks are spent and redeposited into banks, part is kept as reserve and the rest is lent again, repeating the cycle and multiplying money.

Collateral is an asset offered as security for a loan; examples include a house/land title and gold jewellery.

To verify identity, address, income, and ownership of collateral, assess creditworthiness, and ensure legal recovery if needed.

It is the extra amount the borrower pays over the principal as the cost of using the lender’s money.

Banks accept deposits to provide safety and interest, and they provide loans to households and firms, earning a spread between lending and deposit rates.

The bank can seize and sell the collateral to recover the outstanding loan amount.

Home loan around 8% per annum; personal loan around 12% per annum.

They collect savings from depositors and lend these funds to borrowers who need money for consumption or investment.

Identity proof, address proof, income proof/salary slips, and property papers such as sale deed or registry.

By increasing the flow of money, enabling more spending and investment, which boosts production, jobs, and incomes.

The Reserve Bank of India (RBI).

Savings: interest with easy withdrawals; Current: frequent transactions, usually no interest; Fixed deposit: higher interest, money locked for a term.