Money in a modern economy is created by a system of two types of institutions: the central bank of the economy and the commercial banks. Commercial banks accept deposits from the public and lend out part of these funds to those who want to borrow, for example as home loans or crop loans. The interest rate paid by the banks to depositors is lower than the rate charged from the borrowers. This difference, called the ‘spread’, is the profit of the bank. People prefer to keep money in banks because banks pay some interest on deposits, and it may be safer than keeping it at home. With cheques and debit cards, a demand deposit also makes transactions more convenient and safer. Banks can lend because they do not expect all the depositors to withdraw what they have deposited at the same time. When a bank gives a loan, a new deposit is opened in the borrower’s name, and so the money supply increases. The position of a bank is shown in its balance sheet, which is a record of its assets and liabilities.
Money deposited by depositors in a bank is its ______.
Which of the following options suits best in the above blank?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Liabilities
A bank must return deposits to the depositors on demand. So deposits are what the bank owes to others, its liabilities.
Option (1) Assets — Incorrect. A bank’s assets are what it owns or can claim, like loans and reserves.
Option (2) Liabilities — Correct. Deposits are the main liability of a bank.
Option (3) Reserves — Incorrect. Reserves are the deposits a bank keeps with the RBI and its cash. They are an asset.
Option (4) Net worth — Incorrect. Net worth is assets minus liabilities.
NCERT (2026-27): “3.3 Money Creation by Banking System … Similarly, commercial banks like State Bank of India (SBI) keep their deposits with RBI and these are called Reserves. Assets = Reserves + Loans Liabilities for any firm are its debts or what it owes to others. For a bank, the main liability is the deposits which people keep with it. Liabilities = Deposits The accounting rule states that both sides of the account must balance. Hence if assets are greater than liabilities, they are recorded on the right hand side as Net Worth.” |