Social Science (087) — AI-generated practice question

Commercial banks act as intermediaries by accepting deposits from people who have surplus funds and using the major portion of these deposits to extend loans to borrowers who need funds. Banks keep only about 5% of deposits as cash reserve to meet daily withdrawal demands.

Role in the economy:

• Credit reaches those who need it for economic activities like farming, trade, and business.
• Banks charge higher interest on loans than they pay on deposits; this difference is their income.
• This flow of funds supports production, employment, and overall economic development.

Source: Chapter 3, Loan Activities of Banks

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The examiner expects three things for 3 marks: (1) the mechanism — deposits → cash reserve → loans; (2) the definition of intermediary (surplus funds → deficit needs); (3) the economic role. Mentioning the 5% cash reserve figure shows textbook accuracy. Avoid writing about RBI or informal credit here — keep it focused on banks as intermediaries.