Correct Option
The correct option is 1 only
Explanation
Banks function as financial intermediaries in an economy. They operate on the principle of mobilizing savings from the public and channeling them into productive investments. This process relies on the mechanism of fractional reserve banking, where banks retain only a portion of deposits as reserves while lending the remainder.
Statement-wise Analysis
- Statement 1 is Correct: The primary function of a commercial bank is financial intermediation. Banks accept deposits from individuals and entities with surplus funds (savers) and lend these funds to those in need of capital for investment or consumption (borrowers). This bridges the gap between liquidity surplus and liquidity deficit sectors.
- Statement 2 is Incorrect: Banks do not keep the entire deposit amount as cash. Under the fractional reserve banking system, banks are required to hold only a small proportion of their total deposits as cash reserves (to meet daily withdrawal demands and regulatory requirements like the Cash Reserve Ratio). The major portion of deposits is extended as loans to earn interest income.
- Statement 3 is Incorrect: This statement generalizes all deposits as having a lock-in period, which is factually wrong.
- Demand Deposits (Current Accounts and Savings Accounts) allow depositors to withdraw money on demand without any lock-in period.
- Time Deposits (Fixed Deposits and Recurring Deposits) have a fixed maturity period, but even in these cases, premature withdrawal is often permitted subject to penalty.
Key Takeaway
Key Takeaway: Modern banking is based on financial intermediation and fractional reserve banking, where banks hold only a fraction of deposits as liquid cash (reserves) and lend the rest to generate credit.