Question

Why do banks keep a small proportion of the deposits as cash with themselves?

• A. To extend loan to the poor.
• B. To extend loan facility
• C. To pay salary to their staff
• D. To pay the depositors who might come to withdraw money.

Answer 1

The correct option is D To pay the depositors who might come to withdraw money.

1:Banks keep a small proportion of their deposits as cash with themselves. This is usually 15% of their deposits as cash. This amount is kept as a provision to pay the depositors who may come to withdraw the money on any day. This amount is enough because only a small fraction of people come to withdraw money on a given day.
2:The rest of the amount is used by the banks to give money on credit to people who need the credit. A bank charges interest on the loan which it gives to its creditors. The interest rate charged by a bank with no loans is higher than the interest rate given by it on deposits. Thus, interest is the main source of income for banks.