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October Current Affairs 2020
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Credit Function of Banks

By AC Team 1 - October 3, 2020

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The credit department’s main function is to lend money and has a major role in the banking
system.

To provide credit or loans, banks require deposits. Banks have deposits in two ways:

when customers deposit money with any commercial bank

when banks advance loans, discount bills, provide overdraft facilities, and make
investments through bonds and securities.

The first type of demand deposits are called “primary deposits”. Banks play a passive role in
opening them. The second type of demand deposits are called “derivative deposits”.

Commercial banks are profit seeking institutions. So when they find that a large volume of
cash received through primary deposits lies idle because all such demand deposits are not
withdrawn at the same time by their customers, they use these resources for advancing
loans or for making investments in securities, shares, etc., thereby earning a high rate of
interest.

Now “primary deposits” is a simple term i.e. when customers deposit money.

But what is “derivative deposits” and why they are called deposits?
The derivative deposits or credit is done by the banks by

Lending – when any person asks for a loan from bank, whether it be personal,
educational, business, etc.

Term loans – a term loan is a monetary loan that is repaid in regular payments over a set
period of time and they usually have unfixed interest rate. Term loans are offered in both
fixed and floating rate of interest. The repayment tenure ranges between 12 months to 60 Month-Wise Current Affairs 2020
months in case of business loans. For certain lending products like personal or home loan
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 the repayment period could be as long as 10 Current Affairs August 2020
years or more, depending upon the loan amount Current Affairs July 2020
and interest rate.
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providing overdraft facility – This facility allows Current Affairs May 2020
an account holder of the bank to use or withdraw
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more money than what they have in their
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account up to the approved limit.
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cash credit – it is also same as overdraft, but
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sometimes the meaning can vary in the form that they are offered for businesses than
individuals.
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bill discounting – Bills discounted are the bills which are purchased after discounting
money. For e.g. A person buys a product from the market, and promises to pay the money
Current Affairs 24 October 2020
at some later time. The shopkeeper will give a bill to the customer. Now if the shopkeeper
AC Team - October 24, 2020
wants the money before that time, he can go to bank with the bill. Now bank will not give
the entire money written on the bill to the shopkeeper, but it will deduct some money
(known as bill discounting) from the bill and lent the remaining to the shopkeeper. Now Current Affairs 23 October 2020
when the shopkeeper receives the money from his customer, he can pay back to bank. AC Team - October 23, 2020

The bank deducts the money or discounts the bill in order to keep the discounted money
with it as interest.
Current Affairs 22 October 2020
AC Team - October 22, 2020
Now why they are called deposits?
When a customer asks for a loan from a bank, bank does not give the money to the
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customer; instead it opens an account and transfers the loan amount to that account. Now
whenever the customer needs money, payment is made through cheques. So as loan as the
loan is due, a deposit of that amount remains outstanding in the books of the bank. Thus
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every loan creates a deposit.

Current Affairs Quiz: 24 October 2020

AC Team - October 24, 2020

Current Affairs Quiz: 23 October 2020

AC Team - October 23, 2020
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