Functions of Commercial Banks Exercise Solutions | KalviGavani

Functions of Commercial Banks: Exercise Solutions

How to Use This Page

Read the Samacheer Kalvi textbook chapter first. Then use this page to revise: attempt the textbook questions on your own, then compare with the model answers below. Pay special attention to the Common Mistakes section and the Exam Checklist before your test.

Key Concepts (Quick Recap)

I. Choose the Correct Answer (MCQ)

Q1. Electronic banking can be done through (a) ATM (b) Mobile (c) Internet (d) All of the above ✓

Q2. Minimum how much amount can be transferred through RTGS? (a) 1 lakh (b) 5 lakh (c) 2 lakh ✓ (d) 10 lakh

Q3. The largest commercial bank of India (a) PNB (b) SBI ✓ (c) ICICI (d) HDFC

Q4. In which kind of account, it is compulsory to deposit certain amount at certain time? (a) Savings deposit (b) Fixed deposit (c) Current deposit (d) Recurring deposit ✓

Q5. Which of the following is not a type of advance provided by commercial bank? (a) Collecting and supplying business information ✓ (b) Overdraft (c) Cash credit (d) Discounting bills of exchange

Q6 (Additional). The primary functions of a commercial bank are of ……… types. (a) Two (b) Three ✓ (c) Four (d) Five

Q7 (Additional). The deposit which has no limitation on deposit of cheques or withdrawals from the account is ……… (a) Savings Deposit (b) Current Deposit ✓ (c) Fixed Deposit (d) Recurring Deposit

Q8 (Additional). Overdraft facility is given ……… account holders. (a) Savings (b) Current ✓ (c) Fixed (d) Recurring

Q9 (Additional). ……… Documents have been notified by the Government of India as 'Officially Valid Documents' for proof of identity. (a) Four (b) Five (c) Six ✓ (d) Seven

Q10 (Additional). National Electronic Funds Transfer (NEFT) was launched by the RBI in ……… (a) 2003 (b) 2004 (c) 2005 ✓ (d) 2006

Q11 (Additional). To identify the bank branch banks use ……… digit alphanumeric code. (a) 9 (b) 10 (c) 11 ✓ (d) 12

Q12 (Additional). National Electronic Funds Transfer was launched by RBI in ……… (a) 2003 (b) 2004 (c) 2005 ✓ (d) 2006

Q13 (Additional). Indian Financial System Code is provided by ……… (a) IDRBT ✓ (b) RBI (c) SBI (d) SEBI

Q14 (Additional). The current maximum limit for Immediate Payment Service (IMPS) is ……… (a) 2 Lakhs ✓ (b) 5 Lakhs (c) 1 Lakh (d) 10 Lakhs

Q15 (Additional). ……… cards services were launched in March 2012 by the National Payments Corporation of India. (a) Visa (b) Master (c) Maestro (d) RuPay ✓

II. Fill in the Blanks

1. NEFT stands for National Electronic Funds Transfer. 2. RTGS stands for Real-Time Gross Settlement. 3. CORE stands for Centralized Online Real-time Exchange. 4. The minimum amount for RTGS transactions is ₹2 lakh. 5. NEFT was launched by RBI in the year 2005. 6. RTGS was launched by RBI in the year 2013. 7. ECS was launched by RBI in the year 1995. 8. IFSC is a 11-digit alphanumeric code to identify a bank branch. 9. IFSC is provided by IDRBT, Hyderabad. 10. RuPay cards were launched in March 2012. 11. IMPS stands for Immediate Payment Service with a maximum limit of ₹2 lakh. 12. BHIM stands for Bharat Interface for Money, launched in December 2016. 13. BBPS stands for Bharat Bill Payment System, operational since August 2016. 14. SBI is the largest commercial bank of India. 15. KYC stands for Know Your Customer.

III. True or False (with corrections)

1. NEFT settles transactions in real time. False. NEFT settles transactions in batches (23 settlements per day), not in real time. RTGS is the real-time settlement system.

2. RTGS can be used for any amount, even ₹100. False. RTGS has a minimum limit of ₹2 lakh. Below that, NEFT should be used.

3. Overdraft facility is given to savings account holders. False. Overdraft facility is given only to current account holders.

4. Current deposits earn interest like savings deposits. False. Current deposits do not earn interest; they offer unlimited withdrawal facility instead.

5. Collecting and supplying business information is a type of advance provided by commercial banks. False. It is a secondary/agency function, not a primary lending function.

6. KYC requires 6 Officially Valid Documents for proof of identity. True. Passport, Driving Licence, Voters' ID, PAN Card, Aadhar, and NREGA Job Card.

7. Fixed deposits allow unlimited withdrawals. False. Fixed deposits have a lock-in period and cannot be withdrawn before maturity without penalty. Current deposits allow unlimited withdrawals.

8. Recurring deposits require a fixed amount to be deposited at regular intervals. True. A recurring deposit is one where a fixed amount is deposited at regular intervals for a specified period.

IV. Match the Following

V. Answer Briefly

Q1. What is Mobile Banking? Most commercial banks have designed computer programs called apps downloadable on smartphones. With such an app, a customer can operate account transactions from anywhere; this service is known as mobile banking.

Q2. Briefly explain the need for a Debit card: An ATM card is also called a debit card. It is useful for purchasing goods and services anywhere in India, provided the shop has a swiping machine facility.

Q3. Briefly explain the term — Credit card: Banks issue credit cards to customers and other eligible persons. The holder can purchase goods and services on credit at any shop in India.

Q4. What do you mean by ATM? ATM stands for Automated Teller Machine. A customer can withdraw money any time, anywhere in India from the ATM machine using the card provided by his/her bank.

Q5. Write a note on — ECS: ECS was launched by the RBI in 1995. It is an electronic method of fund transfer from one bank to another. ECS credit can be used to credit salary, dividend, interest, pension, etc.

Q6 (Additional). Give the features of Smart card: Smart cards are used for day-to-day purposes. Their features include: (1) Strong device security, (2) Biometrics.

Q7 (Additional). What do you mean by 'KYC'? KYC means "Know Your Customer." It is the general rule for banks to get information regarding identity and address of customers. A person opening a bank account should submit proof of identity, proof of address, and a recent photograph. Six documents have been notified by the Government of India as Officially Valid Documents (OVDs) for proof of identity.

Q8 (Additional). What is Capital Formation? Banks encourage savings habits among people and accumulate their small dormant savings. These funds can be fruitfully channelized for productive purposes of the economy.

Q9 (Additional). What do you mean by Gift Cheque? Denomination-printed cheques available in attractive designs, intended to be presented as a gift, are known as Gift Cheques.

Q10 (Additional). What is meant by Bank Assurance? The offering of insurance policies or products by a bank in association with another insurance company is known as Bank Assurance.

Q11 (Additional). What is Venture Capital Fund? Give Example: Start-up share capital provided to new ventures that are little known, unregistered, risky, young, and small private businesses — especially in technology-oriented and knowledge-intensive businesses — is known as Venture Capital Fund. Example: SBI and Canara Bank have set up venture capital fund subsidiaries.

Q12 (Additional). Write a note on Funds transfer through SMS: *99# is the number for fund transfer from any mobile phone. It was launched in 2014. Every common man in India can transact banking transactions from any corner of India.

VI. Answer in Detail

Q1. Discuss the various primary functions performed by the commercial banks: The primary functions are of three types: (1) Accepting Deposits: The basic deposit accounts are offered by commercial banks. Banks compete to attract customers by adding facilities. Deposit accounts can broadly be classified into demand deposits and time deposits. (2) Granting Loans and Advances: The second primary function is lending money to earn interest income. Banks provide specific sums as loans repayable along with interest. Demand loans should be repaid whenever demanded. Term loans can be repaid after the agreed period. Advances are credit facilities provided for short periods (within a year). (3) Creation of Credit: Apart from currency money issued by RBI, the credit money created by commercial banks influences a country's economic activities to a large extent. Credit money of commercial banks is far greater in volume than currency money.

Q2. Explain the various secondary functions of commercial banks: These services can be broadly classified into agency services and general utility services. I. Agency Functions: (1) Transfer of Funds, (2) Periodic Payment of Premiums, Rent, etc., (3) Collection and Payment of Cheques, (4) Acting as Executors, Trustees, and Attorneys, (5) Conduct Share Market transactions, (6) Preparation of Income Tax Return, (7) Dealing in Foreign Exchange, (8) Acting as Correspondent. II. General Utility Functions: (1) Issue of Demand Drafts and Bankers' Cheques, (2) Accepting Bills of Exchange on behalf of Customers, (3) Safety Lockers, (4) Letters of Credit, (5) Travellers Cheques, (6) Gift Cheques, (7) Reference Service.

Q3 (Additional). Briefly explain the Electronic Banking Functions (Any Five): (1) NEFT: Launched by RBI in 2005. Bulk transfer settled in batches, 23 settlements per day. Uses IFSC — an 11-digit alphanumeric code. (2) RTGS: Launched by RBI in 2013. Transactions settled on a real-time basis. Minimum limit is 2 lakhs. (3) ECS: Launched by RBI in 1995. Electronic method of fund transfer from one bank to another. (4) CORE Banking Solutions: Centralized Online Real-time Exchange. All details of all accounts available in the centralized server. (5) Internet Banking or Virtual Banking: Performing banking operations through the internet, 24 hours a day, 7 days a week.

Q4 (Additional). Write a note on the types of Loans: (1) Housing Loan: Taking title deeds of the house as collateral security, banks advance medium and long-term loans. The customer repays the loan in equated monthly installments. (2) Consumer Loans: Consumer durables can be purchased with consumer loans. The product purchased is hypothecated as security. The customer pays in equated monthly installments. (3) Vehicle Loans: Two-wheelers, cars, buses, and other vehicles can be purchased by individuals and institutions obtaining vehicle loans from banks. (4) Educational Loan: Provided by banks to students for studying undergraduate, postgraduate, or professional courses. After course completion, one year is allowed for employment before repayment begins. (5) Jewel Loan: Customers pledge their gold jewels and obtain loans from banks. The margin requirement is fixed by the RBI. Interest should be paid every month; otherwise, interest on interest is charged. Within 12 months the customer can redeem or re-pledge.

Common Mistakes to Avoid

1. RTGS minimum = ₹2 lakh — Not ₹1 lakh or ₹5 lakh. Below ₹2 lakh, use NEFT instead. 2. NEFT = batch settlement (not real-time) — RTGS = real-time. Don't confuse them. 3. Current Deposit has NO withdrawal limits — Savings deposits have restrictions; current deposits don't. 4. Overdraft is for CURRENT account holders — Not savings or fixed deposit accounts. 5. Collecting and supplying business information is NOT a type of advance — It's a secondary/agency function, not a primary lending function. 6. IFSC = 11-digit alphanumeric code — Provided by IDRBT, not RBI or SEBI. 7. RuPay launched in March 2012 — Not Visa, Master, or Maestro. 8. KYC = 6 Officially Valid Documents — Passport, Driving Licence, Voters' ID, PAN Card, Aadhar, NREGA Job Card. 9. Recurring deposit = fixed amount at regular intervals — Not a lump sum (that's fixed deposit) and not unlimited withdrawals (that's current deposit). 10. SBI is the largest commercial bank of India — Not PNB, ICICI, or HDFC.

Exam Checklist

• [ ] Can list 3 primary functions (deposits, loans, credit creation)
• [ ] Can classify deposits (demand vs time deposits)
• [ ] Know agency functions (8 types) and general utility functions (7 types)
• [ ] Can explain NEFT (2005, batch, 23 settlements/day) vs RTGS (2013, real-time, min ₹2L)
• [ ] Can explain CORE banking (Centralized Online Real-time Exchange)
• [ ] Know types of loans (housing, consumer, vehicle, educational, jewel)
• [ ] Know KYC and 6 OVDs
• [ ] Know ECS (1995), BBPS, BHIM, IFSC details
• [ ] Can define cheque and crossing of cheque
• [ ] Know deposit types (savings, current, fixed, recurring) and their features
• [ ] Know types of advances (overdraft, cash credit, discounting bills)
• [ ] Can explain mobile banking, virtual banking, BBPS, BHIM
• [ ] Know SBI as the largest commercial bank of India
• [ ] Can distinguish demand deposits vs time deposits