Social Science (087) — AI-generated practice question

Banks accept deposits from the public but keep only a small proportion (about 5%) as cash reserves to meet daily withdrawal demands. The remaining major portion is lent out to borrowers. This way, banks mediate between depositors (surplus funds) and borrowers (need funds), making credit available for various economic activities.

Risk created: Since banks do not hold all deposits as cash, if all depositors demand their money simultaneously, the bank cannot repay everyone. This could cause the banking system to collapse, harming both depositors and the economy.

Source: Chapter 3 – Money and Credit, 'Loan Activities of Banks'

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• The examiner expects two parts: (1) how lending of deposits makes credit possible, and (2) the risk this creates.
• Quote the key fact: banks hold ~5% as cash reserve in India.
• The textbook's own question — "What would happen if all depositors asked for money at the same time?" — is the direct hint for the risk part. Always use it.
• Avoid over-explaining; 3 marks = roughly 3 distinct points stated clearly.