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.