Question

State whether the following statements are True or False.
1. Commercial banks are the backbone of modern economy.
2. The saving bank deposit can be opened with a small amount.
3. Credit money is created by the central bank of a country.
4. There is no difference between primary deposit and secondary deposit of a commercial bank.

Answer 1

1. Commercial banks are the backbone of modern economy. – True

Explanation:
The above statement is true. By channelizing the surplus money from the public to loan seekers, they create credit in the economy. Credit creation paves the path for the growth of the economy. Also, commercial banks play an important role in controlling money supply in the economy. Thus, commercial banks are considered the backbone of modern economy.

2. The savings bank deposit can be opened with a small amount. – True

Explanation:
The above statement is true. A savings bank deposit can be opened with a small amount as specified by the banks. These accounts are generally opened by salaried people who wish to save a proportion of their income. A nominal amount of interest is paid on these deposits.

3. Credit money is created by the central bank of a country. – False

Explanation:
The above statement is false. Credit is created by the commercial banks of a country. People deposit their money with the commercial banks. A portion of these deposits (after keeping the reserves) is then further lent out to the general public as loans. The money spent by the borrowers again come back to the bank in the form of deposits (if it is assumed that all transactions are routed through banks). The banks again keep a portion of the deposits with them and lent the rest and so on. In this way the commercial banks create credit.
Note that as central bank does not accepts deposits and lends to the general public, it cannot create credit.

4. There is no difference between primary deposit and secondary deposit of a commercial bank. - False

Explanation:
The above statement is false. Primary deposits are simply cash deposits made by the general public in the bank, while secondary deposits are that part of cash deposits keeping aside the mandatory reserve as specified by the central bank. The secondary deposits are used to create credit through loans.