UPSC Prelims 2019 Q64: Indian Economy – Banking & Financial Sector
- (a) Advances
- (b) Deposits
- (c) Investments
- (d) Money at call and short notice
Answer: (b) Deposits
Explanation
Commercial Bank: Asset vs Liability
| Item | Assets or Liability? |
|---|---|
| Advances (loans given to customers) | ASSET - money receivable |
| Deposits (money received from customers) | LIABILITY - money owed back |
| Investments (govt securities, bonds) | ASSET |
| Money at call and short notice (lent to other banks) | ASSET |
| Cash reserves with RBI | ASSET |
Deposits are the bank's obligation to pay depositors back - they are a liability, not an asset.
Answer: (b) Deposits.
Why each option is right or wrong
- (a) Incorrect. Advances (loans given) are receivables - a bank ASSET.
- (b) CORRECT. Deposits are money the bank owes to depositors - a bank LIABILITY, not an asset.
- (c) Incorrect. Investments (in govt securities, corporate bonds) are ASSETS.
- (d) Incorrect. Money at call and short notice (lent to other banks) is an ASSET.
Key point
Bank ASSETS = advances, investments, cash reserves, money at call. Bank LIABILITIES = deposits, borrowings, capital & reserves. Deposits are liabilities.
Remember
Deposits are NOT included in the assets of a commercial bank in India - they are LIABILITIES, since the bank owes the deposit amount back to the depositor. Advances (loans given), investments and money at call and short notice are all bank assets.
Common mistakes
- Confusing 'money in bank' - deposits sit as liabilities on bank's balance sheet.
- Assuming all inflows are assets - actually deposits are inflows the bank must return.
- Missing that a bank's business model converts liabilities (deposits) into assets (loans/investments).
Exam tip
Bank balance sheet: LIABILITIES = capital + reserves + deposits + borrowings. ASSETS = cash + balances with RBI + money at call + investments + advances + fixed assets. CRR, SLR are on the asset side (as balances/investments).
Sources
- RBI - Basic Statistical Returns of Scheduled Commercial Banks
- NCERT Class 12 - Macroeconomics (Money and Banking chapter)