Given below are two statements:
Assertion (A): A bank must balance its lending activities so that sufficient funds are available to repay any depositor on demand.
Reason (R): Banks do not expect all the depositors to withdraw what they have deposited at the same time.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): A bank must balance its lending activities so that sufficient funds are available to repay any depositor on demand. — True. A bank keeps part of its funds back to repay depositors whenever they ask.
Reason (R): Banks do not expect all the depositors to withdraw what they have deposited at the same time. — True. This is why a bank can lend a part of its deposits.
Why R does not explain A?
R tells us why a bank is able to lend at all. A is about why it must limit its lending. The real reason for A is that repaying depositors on demand is needed for the bank’s survival. People keep money in a bank only if they are sure of getting it back.
NCERT (2026-27): “Commercial Banks … What does the bank do with the funds that have been deposited with it? Assuming that not everyone who has deposited funds with it will ask for their funds back at the same time, the bank can loan these funds to someone who needs the funds at interest (of course, the bank has to be sure it will get the funds back at the required time). So the bank will typically retain a portion of the funds to repay depositors whenever they demand their funds back, and loan the rest. Since banks earn interest from loans they make, any bank would like to lend the maximum possible. However, being able to repay depositors on demand is crucial to the bank’s survival. Depositors would keep their funds in a bank only if they are fully confident of getting them back on demand. A bank must, therefore, balance its lending activities so as to ensure that sufficient funds are available to repay any depositor on demand.” “3.3 Money Creation by Banking System Banks can create money in a manner similar to that as given in Lala’s story. Banks can lend simply because they do not expect all the depositors to withdraw what they have deposited at the same time. …” |