Given below are two statements: one is labelled as Assertion (A) and the other is labelled as Reason (R).
Assertion (A): Commercial banks can lend out a part of the deposits they receive, keeping only a portion as reserves.
Reason (R): The interest rate paid by banks to depositors is lower than the rate charged from borrowers.
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).
Both statements are true. R tells us why lending is profitable for a bank. It does not tell us why a bank is able to lend deposits.
Assertion (A): Commercial banks can lend out a part of the deposits they receive, keeping only a portion as reserves. — True. A bank keeps a part of its deposits to repay depositors and lends the rest.
Reason (R): The interest rate paid by banks to depositors is lower than the rate charged from borrowers. — True. This difference is called the spread. It is the profit of the bank.
Why R does not explain A?
The spread explains why a bank wants to lend. It does not explain how it can lend money that depositors may ask for.
The real explanation of A: banks do not expect all depositors to withdraw their money at the same time. So they can safely lend a part of it.
NCERT (2026-27): “Commercial Banks Commercial banks are the other type of institutions which are a part of the money-creating system of the economy. In the following section we look at the commercial banking system in detail. They accept deposits from the public and lend out part of these funds to those who want to borrow. The interest rate paid by the banks to depositors is lower than the rate charged from the borrowers. This difference between these two types of interest rates, called the ‘spread’ is the profit appropriated by the bank.” “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. When the banks lend to any person, a new deposit is opened in that person’s name. Thus money supply increases to old deposits plus new deposit (plus currency.)” |