Rajasthan Board RBSE Class 12 Economics Chapter 18 Commercial Bank: Meaning and Function
RBSE Class 12 Economics Chapter 18 Practice Questions
RBSE Class 12 Economics Chapter 18 Multiple Choice Questions
The Primary function of a bank is :
(a) To accept deposits and advance loans
(b) To issue currency
(c) To work as a government bank
(d) Providing economic assistance to bank
Which of the following deposit accounts, provides the highest interest rate?
(a) Current account
(b) Recurring deposit account
(c) Saving account
(d) Fixed deposit account
What is ATM facility ?
(a) To open a bank counter for 24 hours
(b) Immediate loan facility from bank
(c) Providing 24 hours banking facility a day through automatic computerised machines.
(d) Normal teller counter of a bank.
Requiste for mobile banking is :
(a) Smart phone
(c) Bank Account
(d) All of these
Through which plan, people can open their bank accounts free of cost ?
(a) Prime Minister Self-Employment Plan
(b) Prime Minister Jan Dhan Yojna
(c) Prime Minister Relief Fund Plan
(d) National Savings Plan
RBSE Class 12 Economics Chapter 18 Very Short Answer Type Questions
Define Commercial Bank.
Commercial bank is a financial institution which accepts deposit from the people and offers loans for the purpose of consumption or investment.
Write down any two functions of Commercial Bank.
Two basic functions of Commercial Bank are :
(i) Accepting deposits
(ii) Advancing Loans.
Explain the term Overdraft.
Clients who have current account get the facility to withdraw more money than the amount present in the particular account. This is called overdraft facility.
What is Internet Banking ?
Nowadays, services are provided by banks to their customers through the internet. It allows customers to carry out transactions, money transfers and other banking services 24 hours a day. This activity is done through the LOGIN ID and password provided by the bank.
Write the full form of ATM.
Automated Teller Machine.
RBSE Class 12 Economics Chapter 18 Short Answer Type Questions
Explain the difference between savings account and current account.
Following are the points of difference between Savings Account and Current Account:
- A saving account is designed with the primary purpose to help you to save.
- This type of account allows the holder to deposit money as per his/her convenience, on which the holder can earn interest.
- A saving account holder earns interest on his/her deposits.
- There is a limit holder on the number of withdrawal transactions.
- As the name suggests, current accounts are best suited for regular transactions.
- This type of account is more suited for big users like firms, companies, public enterprises, businessmen, etc.
- Current account holder does not earn interest, on his/her account.
- Current account usually does not carry a limit on the number of withdrawal transactions.
State the primary functions of banks.
Primary functions of banks are the following :
- Accepting deposits
- Advancing Loans
- Credit Creation
- Agency Services
- Other Services.
What is Mobile Banking ? Explain.
Mobile Banking is a service provided by the bank that allows its customers to conduct financial transactions remotely using a mobile device such as a smartphone or tablet. Unlike internet banking, it uses software, usually called an app, provided by the financial institution for the purpose. Mobile banking is usually available on a 24-hour basis where the customer can download the app from Google playstore and enjoy the facilities.
Write down any two services provided by banks presently.
Following are the two services provided by the banks presently :
- Locker facility : Commercial banks provide locker facilities for the safe-keeping of valuables such as precious ornaments, land deal papers, legal documents, etc.
- Credit card facility : Commercial banks provide banking facility through credit card. Banks provide credit facility to their customers upto a limited amount through credit card issued on their account. Payment at any place may be made through use of credit card in a very short time.
What are the limitations of credit creation by banks ?
Following are the limitations of credit creation by banks :
- Level of development of banks : The countries in which the level of development of banking services is not adequate, credit-creation facility is also limited there.
- The attitude of public : The banking habit of people also has a direct impact on capacity of credit creation.
- Monetary policy of central bank : Liberal monetary policy encourages credit creation in a country.
- Level of development in business and industry : Those countries which have attained higher level of industrial development, the banking transactions in these countries are higher, and thus, they have high creation capacity.
RBSE Class 12 Economics Chapter 18 Essay Type Questions
Define commercial bank. Also, explain in detail the functions of commercial banks.
A commercial bank is an institution that provides services such as accepting deposits, providing business loans, and offering basic investment products. Commercial bank can also refer to a bank, or a division of a large bank, which specifically deals with deposits and loan services provided to corporations or large/middle-sized business.
Main definitions given by economists :
- According to Oxford dictionary, “A commercial bank is that financial institution which accepts deposits from the people and offers loans for the purpose of consumption or investment.”
- According to the Indian Banking Companies Act, 1949, “Banking companies are the ones which transact the business of banking which means the accepting of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise”.
- According to the Findlay Shirras, “Banker is an individual, firm or company who has place for doing the business where the money or currency is deposited, and through this deposited money or currency, the function of credit is performed and the deposited money are paid either by draft, cheque or order”.
- According to Crowther, “Commercial bank is an institution which collects money deposits from those who have it in spare or who are saving it out of their income, and lend this money out to those who need it”.
Functions of commercial banks are broadly classified into three categories :
- Primary functions
- Agency-related function
- General utility functions
1. Primary or main functions : Commercial banks perform two primary functions : (a) Accepting deposits : Accepting deposits from- the public is the most important function of a bank. Customers deposit their savings in the saving account and banks pay interest on sayings. To attract deposits of public, bank offer different types of accounts. These are :
- Savings Account
- Fixed Deposit Account
- Current Account
- Recurring Deposit Account
- Pradhan Mantri Jan-Dhan Yojana Account
(b) Advancing loans : Another important function of bank is advancing of loans. Banks provide loan facility to its regular customers. Bank grants loans mainly for the construction of house, education, marriage, purchase of vehicle, etc. Banks provide loans in the following ways:
- Loans or Advances
- Cash credit
- Discounting the bills of exchange.
2. Agency-related functions : Banks also perform agency functions for and on behalf of their customers. Customers have to give the bank in writing for these services. Some services that are performed by the bank are free of cost, and for some services, banks charge an amount of fees. Following are the works performed by the bank as an agency :
- Cheque bill collection
- Cheque bill payment
- Payment from customers .
- Receipts from customers
- Sale and purchase of foreign securities
- Transfer of payments
- Working as a trustee.
3. General Utility Functions : Modern banks also perform additional tasks along with formal functions which are as follows :
- Providing locker facility
- Foreign exchange facility
- Traveller cheque facility
- Creation of credit
- Arrangement of public loans
- Collection and publication of information
- Credit card facility
- ATM facility
- Internet banking facility
- Mobile banking facility.
What do you mean by credit creation ? Explain the methods of credit creation adopted by the commercial banks.
Credit creation is a situation in which banks gives more loans to consumers and businesses, with the result that the amount of money in circulation increases. In other words, it refers to the unique power of the banks to multiply loans and advances and hence create credit on the basis of primary deposit of account holders.
Following are the methods of credit creation :
(i) By issuing notes
(ii) By accepting deposits
(iii) By discounting the bills of exchange
(i) By issuing notes : In modem times, the issue of currency in most of the countries is done by the central bank of the country. In India, Reserve Bank of India performs the task of issuing notes. For this purpose, RBI uses minimum reserve system. This is called credit creation by the central bank.
(ii) By accepting deposits : Prof. Honum has divided the deposits into two parts –
(a) Primary deposits
(b) Derived deposits
(a) Primary deposits : Primary deposits are those deposits that a bank collects from different surplus stakeholders in the economy by different accounts. These consist of cash deposited by the people with the banks in different deposit accounts, such as saving deposits, time or fixed deposits, current or demand deposits and other deposits. The depositors themself take the initiative of creation of these deposits.
(b) Derived deposits : Deposits created from different underlying transactions of bank are called derivative deposits. The prime underlying transaction includes, granting credit to clients in various forms. Therefore the banks, in the process of granting credit, create derivative deposits. The loans are sanctioned and credited to the accounts of the borrowers to create new deposits. Thus, it is true to say that “deposits create loans and loans create derived deposits”.
(iii) By discounting bills of exchange : Banks also create credit by discounting bills of exchange like foreign exchange, sale and purchase of foreign securities, etc :
Explanation of creation of credit through an example : Assume that an intial deposit of ? 20,000 is made in a commercial bank. If the bank’s cash reserve ratio is 20% then according to the loan provision, the bank can keep 20% of its initial deposit (₹ 4000) aside and can sanction the balance amount (₹ 16000) as loan. This amount of ₹ 16000 would not be given as cash to the lender but would be deposited in his account. The person can withdraw the amount since bank knows that a person is allowed to withdraw only 20% the amount at a time. (If the bank issues a loan of ₹ 16000 to an individual, the credit deposited can again be given in the form of loan). In this way, every loan gives rise to deposits. Therefore, the bank would keep the remaining amount of (16000 × 20%) ie. ₹ 3,200, and the rest of the amount ie ₹ 12,800 would again be provided as loan.
Therefore, it is clear from this example that from an initial deposit of ₹ 20,000, bank can create credit of ₹ 80,000.
Explanation Through Table
Limitations of Credit Creation :
- Development of Banking – Credit creation is more, where development is more. And, the credit creation is lesser, where development of banking is lesser.
- Habit of Banking – The country, whose people use more banking facilities, credit creation is more used there.
- Industrial and Business development – The country, where industries and business are more developed, credit creation is more.
- The Monetary Policy of Central Bank – The Monetary Policy of Central Bank also affects credit creation. Flexible and liberal Monetary Policy promotes credit creation, while rigid monetary policy, keeps it lagging.
It is clear from the given example, that how commercial banks create credit through deposits. How much cash would be created is defined through the cash fund ratio. According to this example, if the cash fund ratio is 20%, then cash creation would be ₹ 8000.
Credit creation visualizes a descent format. It is based on the following assumptions –
- A cheque received from a bank can be deposited in some other bank.
- The cash fund ratio of the bank remains stagnant.
- People ask for the loan till the maximum loan providing limit of the bank is reached.
- Banks also try to provide the loans till their maximum limit is reached.
RBSE Class 12 Economics Chapter 18 Other Important Questions – Answers
RBSE Class 12 Economics Chapter 18 Multiple-Choice Questions
Credit currency is regulated by :
(a) Commercial bank
(b) Central bank
(c) Cooperative bank
(d) None of these
Bank is an institution which :
(a) Deals in receipt and payment of currency
(b) Invests the money
(c) Grants loan
(d) All of these
Which of the followng is not a task of commercial bank ?
(a) Granting loan
(b) Accepting deposit
(c) Creation of credit
(d) Control of credit
Banks accept deposits in :
(a) Saving A/c
(b) Current A/c
(c) Fixed deposit A/c
(d) All of these
Origin of word ‘Bank’ is from :
(a) The word ‘Banking
(b) From the word ‘Banco’
(c) From the word ‘Bankam’
(d) None of these
The task of a commercial bank is :
(a) Accepting deposit
(b) Advancing loans
(c) Agency operation
(d) All of these
Modern banking business was started in:
Credit economics means :
(a) payment to be done in future
(b) from the depositing party
(c) through confidence
(d) None of these
If cash reserve ratio increases the credit value then the value of cash creation :
(c) Remains same
(d) First increases than decreases
“Derived deposit creation is credit creation’. Who said this ?
(b) Holin K
RBSE Class 12 Economics Chapter 18 Very Short Answer Type Questions
Origin of the word “Bank” is from which word ?
Origin of the word ‘Bank’ is from the Italian word Banco.
Where was modem banking developed ?
Modern banking was developed in Europe.
In India, commercial banks are regulated by which act ?
In India, commercial banks are regulated by ‘Indian Banking Companies Act, 1949’.
Saving Account of banks is suitable for which type of people ?
It is suitable for small depositors and salaried employees.
What is demand Saving ?
Demand savings are those savings which are paid by the banks when demanded by the customers.
What is fixed deposit ?
The deposits that can be withdrawn after a specific period and which carry a high rate of interest are known as fixed deposits.
What is Pradhan Mantri Jan-Dhan Yojana ?
The Pradhan Mantri Jan-Dhan Yojana provides facility for common people to open a bank account at zero balance. Loan facility of ₹ 5000 is provided by the bank in these accounts for account holders if accounts are operated regularly.
What is an overdraft ?
An overdraft is a facility of withdrawing the amount more than the account balance present in the account of the account holder.
What do you mean by agency services of bank ?
Agency services of bank means those services which banks perform on behalf of their customers.
What type of account is suitable for businessmen ?
Current account is suitable for businessmen.
What is a bearer cheque?
Cash payment on this type of cheque is made to the bearer of cheque on presentation.
What is crossed cheque ?
Payment of this type of cheque is made to the person whose name is written on the cheque, and the money is deposited in his account only.
From where do the banks create credit ?
Banks create credit from customer’s deposits.
What are primary deposits ?
Primary deposits are those deposits which are deposited as real currency by the depositor in the bank.
What are derived deposits ?
These are also called as secondary deposits, These deposits arise due to loans given by the banks which are assumed to be deposited in the bank.
Write the name of Central Bank of India.
Reserve Bank of India is the central bank of India.
How do banks provide 24-hour service to the customers ?
Banks provide 24-hour service to their customers through Internet banking.
What do you mean by credit creation ?
Credit creation is a situation in which bank gives more loans to consumers and businesses, with the result that the amount of money in circulation increases.
What do you mean by credit ?
In economics, credit means the capacity of advancing loans.
State two benefits of credit.
- Convenience in payments.
- Increase in the standard of living.
Write two drawbacks of credit.
- Increase in extravagance
- Fear of extra production.
Write two limitations of credit development.
- Cash-reserve ratio
- Banking development.
State two assumptions of credit development.
- The Cash Reserve Ratio of bank remains constant.
- Bank tends to give the loans till their maximum limit is reached.
“Creation of derived deposits is creation of credit.” who said this ?
How does central bank create credit ?
Central bank creates credit by issuing paper currency.
Define primary deposits.
Primary deposits are such deposits, wherein monthly payment is made for a fixed period of time.
Write two tasks of banks as an agency.
- Working as a trustee.
- Sale and purchase of securities or financial facilities for the customers.
What is the benefit of credit card ?
With the use of credit card, payments can be made any time and any where without the use of cash.
What type of monetary policy increases credit creation ?
Simple and Liberal monetary policy increases credit creation.
What is compulsory for mobile banking ?
Smartphone, internet and an account in the bank is compulsory for mobile banking.
RBSE Class 12 Economics Chapter 18 Short Answer Type Questions (SA-I)
Explain the origin of the word ‘bank’ in brief.
The word ‘Bank’ is originated from the Italian word ‘Banco’. In Italy, people used to carry out money exchange by sitting on the benches. Another theory says that ‘Bank’ word has originated from the German word ‘Banck’. Later, this ‘Banck’ became the English language word’Bank’.
From where did modern banking business start ?
Modem banking business started from Europe. In the year 1157, Bank of Venice was established in Italy. After that, in the year 1401, Bank of Barcelona, in the year 1407, Bank of Geneva, in the year 1609, Bank of Amsterdam, in the year 1619, Bank of Hamburg, and in year 1694, Bank of England was established.
When was modem banking established in India ?
Establishment of modem banking business in India took place along with the foundation of Bank of Calcutta in the year 1806, Bank of Bombay in the year 1840, and Bank of Madras in the year 1942.
Give two definitions of bank.
(i) According to Findlay Shirras “Banker, is an individual, firm or company who has place for business where the money or currency is deposited, and through this deposited money or currency, the function of credit is performed and the deposited money is paid either by draft, cheque or through an order”.
According to Crowther, “A banker is a dealer in debt of his own and other people The banker’s business is then to take the debts of other people, to offer his own in exchange and thereby to create money”.
What is current account ?
An account with a bank from which money may be withdrawn without notice, typically an active account catering for frequent deposits and withdawal by cheque.
What do you mean by cash credit ?
Cash credit is a type of short-term loan provided to companies by the bank, to fulfil their working capital requirement.
What do you mean by an overdraft ?
An overdraft is a facility given by the bank to the companies to withdraw money “more” than the balance available in their respective accounts.
What do you mean by traveler cheque facility ?
It is a facility provided by the banks to their customers travelling abroad to make their ’ visit more safe and enjoyable. Through these cheques, the person can withdraw the required amount anytime from any branch of the bank. Therefore, the traveler would not take the risk of carrying the cash.
How does a commercial bank create derived deposits ?
Commercial bank provides loans to its customers for different works. When loan is f sanctioned then the loan amount is transferred to the customer’s account. Customers can withdraw amount from their account as per their need and requirement. This is how, by providing loan, deposits are created. These are called derived deposits.
What is an ATM facility ?
With the help of these machines, customers can withdraw a limited sum of money from their bank accounts. They need not go to the bank whenever they require cash. It is a I computerized machine which is attached with the bank’s server.
What is the locker facility provided by the banks ?
Commercial banks provide locker facility to their customers for the safe-keeping of valuables such as precious ornaments, land-deal papers, legal documents, etc. and they charge an annual fees for this facility. There are two keys of that locker; one remains with the customer and the other one is kept by the bank. Locker can be opened only when both the keys are entered together.
What is a credit card facility ?
Today, commercial banks are providing credit card facility to their customers, in which a credit limit of the customer is fixed. For one month, customer can purchase items or goods from market without the use of cash upto this credit limit, and he can also make payment of telephone bill, gas bill, electricity bill, etc. Customer has to pay the bank within the time provided to them, otherwise bank charges a high rate of interest.
What do you mean by internet banking ?
Internet banking means carrying out banking activities through the Internet. But, before availing this facility, the customer needs to fulfil some basic formal requirements. After that, the customer enjoys the facilities of Internet banking like enquiring about the account, making various payments, online shopping, transferring the money from one account to another. The Bank issues a LOGIN ID and a PASSWORD for the same.
What do you mean by mobile banking ?
Today, banks are providing banking facilities to their customers through various mobile apps. Customers can manage their account through these mobile apps from their smartphones. In mobile banking, customers enjoy all the facilities of net banking like making payments, transfer money, etc. They need a login ID and Password for the same.
Mention the main accounts in which bank accepts deposits.
Following are the main accounts in which bank accepts deposits :
- Saving Account
- Current Account
- Fixed deposit Account
- Pradhan Mantri Jan-Dhan Yojana Account
- Recurring deposit Account
Mention the different methods by which banks advance loans.
Banks provide loans by the following methods :
- Loan and advances: These types of loans are for a fixed period of time and of a fixed amount.
- Cash credit: Under cash credit, bank provides loans keeping finished goods and property as a mortgage.
- Overdraft : This facility is given to current account holders. In this, customer can withdraw an amount more than the balance in his/her account upto a certain limit, for his/her short term needs.
What do you mean by discounting of bill of exchange ?
Commercial banks provide loans to the seller of the goods, before the due date of termination of bill. This is called discounting of Bills of exchange. Before the due date, the bank recovers the amount of bill from the seller. The bank then deducts the fees and applicable interest from the seller. And if the seller does not pay the payment on the due date or disrespects the bill, than the bank recovers the amount of bill from the seller.
What do you mean by underwriting in banking ?
Underwriters, in the banking sector, perform the critical operation of appraising the credit of a potential customer and whether or not to offer loan. They appraise the credit history of the customer through their past financial records, statements and value of collaterals provided, among other parameters. Banks, at the time of allotment of shares and debentures by the companies, perform underwriting. It means, that the part of shares and debentures which is not bought by the public, the banks guarantee it to buy, and along with this, the company becomes free from the problem that what would be done in case the public won’t buy its shares and debentures.
What are fixed deposits ?
The account which is opened for a particular fixed period by depositing a particular amount is known as fixed deposit account. In comparison to other accounts, the interest given on this account is much higher. It means that the deposit is fixed and is repayable only after a specific period. The rate of interest paid for fixed deposit varies according to amount, period and from bank to bank.
What do you mean by “References given by the banks” ?
Banks provides information about the economic condition of foreign traders to their own country’s traders and vice versa. It helps in facilitating trade between the two countries.
RBSE Class 12 Economics Chapter 18 Short Answer Type Questions (SA-II)
What are a bank’s functions as an agent?
Following are the functions of a bank as an agent:
- Payment of cheques and bills.
- Receiving of cheques and bills.
- Accepting payments on behalf of customers.
- Making payments on behalf of customers.
- Making sale and purchase of securities on behalf of customers.
- Doing underwriting work.
- Working as a trustee of customers.
- Working as a financial advisor to customers.
- Issuing traveller cheques.
What are the general functions of a bank?
Following are the general functions of a bank :
- Arranging foreign exchange.
- To provide public loans.
- To provide locker facility.
- Providing facility of traveller cheques.
- Collecting and publishing information.
- Clearing house functions.
- Creation of credit.
When black money increases in a country resulting in increasing the risk for economy, to overcome this challenge, a policy called demonetisation is adopted by the Central Bank. Under this, first of all, government seizes and bans the use of old currency notes and issues a completely fresh, new currency. Thus, the ones having illegal currency in the form of black money, can no longer use their black money.
What is a term – deposit bank account?
Under term – deposit bank account, customers deposit a predecided amount for a predecided period of time. The rate of interest varies along with the time period. Term-deposit account promises more rate of Interest than any other account. This type of account is best suitable for the people who have a desired sum of money and may not be using it in the near future. Either a single person or two persons can jointly form this account and nominee is required here. Cheque book is not provided here. But, there are certain limitations to it. Money can only be withdrawn after the expiry of the term period.
What is cash fund ratio ? How does cash fund ratio effect credit ?
According to Central Bank’s instructions, every bank has to keep a specific percentage of deposits in cash funds which is called cash fund ratio. Cash fund ratio effects the credit creation capabilities of banks. If cash reserve ratio is high, the credit created by bank is low, and if cash reserve ratio is low, then credit created by bank is high. For example : If cash reserve ratio is 20%, then from a deposit of ₹ 100, the bank can give loan of up to ₹ 80 only.
RBSE Class 12 Economics Chapter 18 Essay Type Questions
Give details of different accounts opened in commercial banks for accepting
State the various accounts that can be opened in a commercial bank.
Clearly define saving bank account and current bank account.
Following is the detail of accounts opened in commercial banks for accepting deposits :
(i) Saving Bank Account
(ii) Current Account
(iii) Fixed Deposit Account
(iv) Recurring Deposit Account
(v) Pradhan Mantri Jan DhanYojana Account
(i) Saving Bank Account: This account is most suitable for low-income group, middle- income group and salaried employees. In this account, money can be deposited and withdrawn anytime and anywhere. Today, these accounts are opened at zero rupee cash deposit.
(ii) Current Account: Current bank account is for big businessmen, big industrialists or institutions. The bank takes service charge in return. Cheque facility is also available in this for those who have a higher number of regular transactions with the bank. In this type of account, there is no limit on the number of transactions per day. It is also known as demand deposit account. Bank do not pay interest on these accounts.
(iii) Fixed Deposit Account: In this account, a limited sum of amount is deposited for a pre-decided time, and the rate of interest provided by the bank varies with the time period. Whatever sum of amount is deposited in this account, bank provides a FDR which contains the entire information of the deposited amount. Information like the deposited amount, date, time period, maturity amount, etc. is given, and, the rate of interest is also stipulated here. The customer can also avail loan through this receipt. And if the customer needs his amount before the maturity period, the bank would provide them the amount along with the interest, but a little less than the decided one, and would only pay the interest amount upto the time period of the amount is kept deposited. This account also requires a nominee.
(iv) Recurring Deposit Account: Recurring deposit is a special kind of term deposit offered by the banks in India which help the people with regular incomes to deposit a fixed amount of their income, every month, into their recurring.deposit account and earn interest at the rate applicable to fixed deposit. This account does not provide cheque facility.
(v) Pradhan Mantri Jan-Dhan Yojana Account: The facility of this account was provided so that the maximum number of citizens can open a bank account. This account can be opened without any charge or at a zero balance. And if the account holder performs the transaction on a regular basis, then he can avail an overdraft facility upto Rs. 5000. This scheme was initiated on 28th August, 2014.
Mention the different ways in which banks advance loans.
One of the two main functions of commercial banks is advancing loans to their customers. Whatever amount is received by the bank, a portion of it is kept as liquid fund and it provides rest of the amount in the form of loan to the people. The rate of interest charged on loans is higher than the rate of interest given on the deposited amount. Following are the different ways in which loans are provided by banks :
(i) Loans and Advances: Loans and advances are such loans which are of a fixed amount and for a fixed period of time. These loans are given by the banks on the basis of security. After advancing the loan, the amount is deposited in the account of the person, so that the person availing the loan can withdraw the amount anytime he wants. And if the loan is not paid back on time, then the security given as mortgage can be sold out by the bank to recover the amount.
(ii) Cash credit: Cash credit is a type of short-term loan provided to companies to fulfil their working capital requirement. Under cash credit, the bank makes available to its customers the facility of loan upto a certain limit. It is a short-term source of finance, having a tenure of up to one year.
(iii) Overdraft : The industrialists having a current account can avail this facility of overdraft. Under this, the person is given the facility to withdraw more amount (up to a certain limit), than the amount present in his/her account. The amount withdrawn more than the actual amount present is called ‘overdraft’. This facility is given after the customer fulfils the terms and requirements. The overdraft facility is dependent on the’ goodwill of the account holder.
(iv) Discounting bill of exchange: It is an an accepted draft or a bill of exchange sold for an early payment to a bank at less than face value after the bank deducts an amount fee and applicable interest charges. The banks collect full value on the draft or bill of exchange when the payment becomes due. The seller of the goods prepares a bill, and the buyer accepts it and gives it back to the seller. If the acceptor does not pay the amount of bill on the maturity date, then the bank would call the writer of the bill or the seller for the amount the facility of this bill has termed as favourable for both buyer and seller. The seller can immediately get the amount and the buyer gets enough time to pay back the amount.