The 3rd chapter of our banking learning course is “Commercial Bank”. In this article, we’ll learn the 25 most important commercial Bank questions and their answers.
If you read every question and its answers carefully, you will be able to prepare for the banking course in a very good way.
You can read the first two chapters of our banking learning course here if you missed them.
- 30 Important Primary Concepts of Banking Questions and Answers [Notes with PDF]
- 30 Important Central Bank Questions and Answers [Notes with PDF]
By reading this post, you may quickly prepare for any competitive tests such as school and college exams, vivas, job interviews, and so on.
So let get started…
Commercial Bank Questions and Answers:
The following are the 25 important commercial bank questions and answers:
Question 01: What is Commercial Bank?
Answer: A commercial bank is a bank that collects deposits, lends, and provides various banking services to its customers for the purpose of making a profit.
Question 02: What are the Objectives of Commercial Banks?
Answer: The followings are the most important objectives of commercial banks:
- It was founded with the primary objective of making a profit.
- Introduce cheques, bills of exchange, and other forms of payment as a medium of exchange.
- Obtaining extra money from the general public and forming capital.
- Public health and safety
- Assisting and participating in the establishment of lending policy and regulation by the central bank.
- Ensuring equitable wealth distribution
Question 03: What are the Features of a Commercial Bank?
Answer: The important features of a commercial bank are as follows:
- Objectives of earning profit
- Collection of savings and sanction of short term loan
- Creation of medium of exchange
- Branch banking system
- Service oriented organization
Question 04: What are the Functions of Commercial Banks?
Answer: The following are the most important functions of commercial banks:
Main Functions:
- Acceptance of deposits and advancing interest
- Granting loans and charging interests
- Creating loan deposits
- Creating a medium of exchange
- Creating capital
- Import and Export assistance
- Government treasury service
Other Functions:
- Capital investment
- Contribution to economic growth
- Money Transfer
- Security of Money
- Employment creation
Question 05: What is the Importance of a Commercial Bank?
Answer: The importance of a commercial bank is as follows:
- Collecting savings and creating capital
- Providing loans & investment
- Creating medium of exchange
- Expansion of home trade
- Helping international trade
- Role as agent
- Creating employment
- Assistance in the transfer of money
Question 06: What is the Role of a Commercial Bank in the Economic Development of a Country?
Answer: The role of a commercial bank in the economic development of a country is as follows:
- To form the necessary capital for the country by collecting small savings.
- Provide short, medium, and long-term loans for business expansion.
- Issuing checks, bills of exchange, drafts, etc. as an easy medium of exchange.
- To play an important role in the expansion of trade and commerce of the country through safekeeping and transfer of money, sale of shares and debentures, etc.
- To assist in international trade by issuing certificates, issuing exchange rates, paying prices, etc.
- To maintain the stability of the economy as directed by the Central Bank to keep the price level of the country right.
- To provide employment to a large number of people through branch expansion.
- To carry out the government’s fiscal policy
Question 07: What are the Principles of Commercial Bank?
Answer: The important principles of commercial bank are as follows:
- Liquidity Principle
- Solvency Principle
- Safety Principle
- Profitability Principle
- Collection of Savings Principle
- Loan and Investment Principle
- Efficiency Principle
- Providing Services Principle
- Secrecy Principle
- Technological Development Principle
- Goodwill Principle
Question 08: What is the Liquidity Principle of a Commercial Bank?
Answer: One of the principles of commercial banks is the liquidity principle. Liquidity is the ability to pay customers’ deposits on demand.
The liquidity principle of a commercial bank is the strategy of conserving the desired amount of liquid assets in order to be able to pay the checks of the customers on demand.
Question 09: Why the Liquidity Principle is so Important for Commercial Banks?
Answer: The main source of funds for commercial banks is demand deposits. This means the bank is obliged to give back only on demand.
If a bank fails to repay such money on demand, the reputation of the bank is severely damaged. As a result, no one deposits money in that bank. Commercial banks have to follow a liquidity policy so that this situation never happens
Question 10: What is the Profitability Principle of a Commercial Bank?
Answer: The profitability principle of a commercial bank is the principle of making more profit by lending or investing in safe and profitable sectors while maintaining liquidity conditions.
Question 11: What is the Confidentiality Principle of a Commercial Bank?
Answer: The confidentiality principle refers to the principle of taking all kinds of personal and technical measures so that the customer’s account information cannot be obtained by anyone other than the person or organization concerned.
Question 12: What is the Principle of Goodwill of a Commercial Bank?
Answer: The principle of creating a positive image in the banking world by providing the best service with honesty and displaying overall skill is called the principle of goodwill of a commercial bank.
Question 13: What is the Solvency Principle of the Commercial Bank?
Answer: Solvency refers to the ability to pay current liabilities. When the amount of real assets decreases from liabilities, the bank’s sovereignty decreases.
This puts the depositors’ deposits at risk. Therefore, in order to expand and survive successfully in a modern competitive environment, the bank has to be well-off and this is called the solvency principle of the commercial bank.
Question 14: What is the Savings Principle of a Commercial Bank?
Answer: The policy of raising bank funds by attracting customers by introducing various accounts, deposit schemes, and other schemes is called the savings principle of a commercial bank.
Question 15: What is the Safety Principle of a Commercial Bank?
Answer: A safety principle of a commercial bank is a strategy to ensure that customers’ deposits and assets are protected from theft and fraud and that lending and investment are as risk-free as possible.
Question 16: What are the Funding Sources for Commercial Banks?
Answer: The following are the most common sources of funds for commercial banks:
- Paid Capital
- Reserve Fund
- Deposits
- Borrowings
Question 17: What are the Sources of Income of Commercial Bank?
Answer: Commercial banks generate income from a variety of sources, including:
- Interest on loan
- Investment
- Bill discount
- Commission Received from Bank draft, Travelers cheque etc
- Rent of Lockers
- Agency Service
- Brokerage in Purchase or Trade of Shares
- Foreign Exchange
Question 18: What are the Expenditures of Commercial Banks?
Answer: Commercial banks incur the following expenses as part of their day-to-day operations:
- Paying interest to clients on their deposits.
- Paying interest to the central bank on the borrowed funds.
- Salary and allowance payments to employees, Director, and manager
- Charges of the auditor
- Charges for litigation or other legal actions taken to collect unpaid loans
- Office and warehouse rents.
Question 19: What is Bank Guarantee Certificate?
Answer: A bank guarantee certificate is a certificate by which a bank assures a person or organization that a customer will not pay a certain amount of money within a certain period of time or if a liability arises.
Question 20: How Loan Creates Deposit?
Answer: If the loan is transferred to the borrower’s bank without paying in cash, the loan will create a deposit as per the bank’s general rules.
Question 21: What is the Loan Deposit Creation of a Commercial Bank?
Answer: The fancy way in which a commercial bank does not lend directly to cash but transfers it as a borrower’s deposit and creates a new loan from that deposit is called commercial bank loan deposit creation or loan-to-deposit creation.
Question 22: What are the Limitations of Creating Loan Deposit?
Answer: The followings are the most common limitation of creating loan deposits:
- Insufficient cash fund
- Insufficient Primary deposits
- Increase the rate of CRR by the central bank.
- Lack of public awareness
- Principle of central bank
- Lack of appropriate bank security
Question 23: Why a Commercial bank is Called a Short-Term Loan Trader?
Answer: The main source of funds for a commercial bank is the deposit and most of which the bank is obliged to return to its customer on demand.
This is why the bank cannot lend this money in the long run, which is why the bank has to give short-term loans. That is why commercial banks are called short-term loan traders.
Question 24: Why Commercial Bank is Called the Middle Man of Money Market?
Answer: The money market refers to the market demand for short-term loans in the country. Commercial banks are the main institution in the country to meet this demand. That is why commercial banks are called the middle man of the money market.
Question 25: Why Commercial Bank is Called the Life Blood of Economy?
Answer: Banks in a country basically means commercial banks. Commercial banks play a major role in economic activities by providing banking services to all types of people. So it is considered as the life force of the economy.
I hope that by the end of this post, you have a good understanding of the “commercial bank” chapter.
You will gain a better understanding of the “commercial bank” chapter if you read these 25 important commercial bank questions and answers on a regular basis.
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