Consider the following statements regarding the loan activities of banks in India: 1. Banks keep the major portion of deposits as cash reserves. 2. Banks in India currently hold about 15 % of their deposits as cash. 3. The main source of income for banks is the interest paid to depositors. Which of the statements given above is/are correct?

Correct Option The correct option is 2 only. Explanation Banks operate as financial intermediaries that mobilize funds from depositors and lend them to borrowers. This process relies on the fractional reserve banking system, where banks retain only a fraction of deposits as liquid cash to meet daily withdrawal demands while lending the rest. Statement-wise Analysis - Statement 1 is Incorrect: Banks do not keep the major portion of deposits as cash reserves. Instead, they use the major portion of the deposits to extend loans to borrowers for various economic activities. Keeping the majority of funds idle as cash would render the banking business unprofitable. - Statement 2 is Correct: Banks in India hold a small proportion of their total deposits as cash to maintain liquidity. This is a provision to pay depositors who might come to withdraw money on any given day. This figure as approximately 15 %, ensuring the bank can manage daily transaction flows. - Statement 3 is Incorrect: The interest paid to depositors is an expenditure for the bank, not income. The main source of income for banks is the difference between the interest charged to borrowers (which is higher) and the interest paid to depositors (which is lower). This difference is known as the spread. Key Takeaway Key Takeaway: Banks function by maintaining a small cash reserve for liquidity (to meet daily withdrawals) and lending the majority of deposits to earn interest. Their profit is derived from the interest spread.

NCERT Class 10 Economics — Chapter 3: Money and Credit

mcqmedium

Consider the following statements regarding the loan activities of banks in India:

Banks keep the major portion of deposits as cash reserves.
Banks in India currently hold about 15 % of their deposits as cash.
The main source of income for banks is the interest paid to depositors.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A2 only
B1 only
C1 and 3 only
D1, 2 and 3

Did you get this right?

Solution

Correct Option

The correct option is 2 only.

Explanation

Banks operate as financial intermediaries that mobilize funds from depositors and lend them to borrowers. This process relies on the fractional reserve banking system, where banks retain only a fraction of deposits as liquid cash to meet daily withdrawal demands while lending the rest.

Statement-wise Analysis

Statement 1 is Incorrect: Banks do not keep the major portion of deposits as cash reserves. Instead, they use the major portion of the deposits to extend loans to borrowers for various economic activities. Keeping the majority of funds idle as cash would render the banking business unprofitable.
Statement 2 is Correct: Banks in India hold a small proportion of their total deposits as cash to maintain liquidity. This is a provision to pay depositors who might come to withdraw money on any given day. This figure as approximately 15 %, ensuring the bank can manage daily transaction flows.
Statement 3 is Incorrect: The interest paid to depositors is an expenditure for the bank, not income. The main source of income for banks is the difference between the interest charged to borrowers (which is higher) and the interest paid to depositors (which is lower). This difference is known as the spread.

Key Takeaway

Key Takeaway: Banks function by maintaining a small cash reserve for liquidity (to meet daily withdrawals) and lending the majority of deposits to earn interest. Their profit is derived from the interest spread.

Your note

More from Chapter 3: Money and Credit

Consider the following statements regarding the impact of high cost of borrowing: 1. A larger part of the earnings of the borrowers is used to repay the loan. 2. The repayment amount is always less than the income of the borrower. 3. It may discourage people from starting enterprises due to the debt burden. Which of the statements given above is/are correct?

medium

Consider the following statements regarding the 'Cheque' facility: 1. The payee instructs the bank to withdraw money from the payer's account. 2. It allows for the direct settlement of payments without the use of cash. 3. Cheques are a form of currency issued by the RBI. Which of the statements given above is/are correct?

medium

With reference to the credit needs in rural areas, consider the following statements: 1. The main demand for credit is for crop production. 2. There is no time gap between buying inputs and selling the crop. 3. Repayment of the loan is crucially dependent on the income from farming. Which of the statements given above is/are correct?

medium

Consider the following statements regarding the 'Krishak Cooperative': 1. It does not accept deposits from its members. 2. It uses deposits as collateral to obtain a large loan from the bank. 3. It provides loans for various purposes including house construction. Which of the statements given above is/are correct?

medium

Consider the following statements regarding the supervision of credit activities in India: 1. The World Bank supervises the functioning of formal sources of loans. 2. There is no organisation that supervises the credit activities of lenders in the informal sector. 3. Banks are not required to share any lending information with the RBI. Which of the statements given above is/are correct?

medium

Keep practising Chapter 3: Money and Credit

Work through every question from this NCERT chapter.

Browse all NCERT Class 10 Economics chapters

Correct Option

The correct option is 2 only.

Explanation

Statement-wise Analysis

Statement 1 is Incorrect: Banks do not keep the major portion of deposits as cash reserves. Instead, they use the major portion of the deposits to extend loans to borrowers for various economic activities. Keeping the majority of funds idle as cash would render the banking business unprofitable.
Statement 2 is Correct: Banks in India hold a small proportion of their total deposits as cash to maintain liquidity. This is a provision to pay depositors who might come to withdraw money on any given day. This figure as approximately 15 %, ensuring the bank can manage daily transaction flows.
Statement 3 is Incorrect: The interest paid to depositors is an expenditure for the bank, not income. The main source of income for banks is the difference between the interest charged to borrowers (which is higher) and the interest paid to depositors (which is lower). This difference is known as the spread.