Commercial Banks ICSE Class 10 Economics: Deposits, Loans and Credit Creation

What Commercial Banks is about

Weightage: CISCE publishes no chapter weightage. The paper has a compulsory Section A (40 marks: 16 one-mark MCQs and three 8-mark questions of four 2-mark parts) and Section B, where you answer any four of six 10-mark questions (two 5-mark parts each).Source: CISCE ICSE Economics (641) specimen paper structure, 2025, retained for 2027 by the CISCE circular of 9 October 2026

Key concepts

Meaning of a commercial bank

A commercial bank is a financial institution that accepts deposits from the public, which are repayable on demand or after a fixed period and withdrawable by cheque or otherwise, and uses these funds to give loans and make investments in order to earn profit. Commercial banks deal in money and credit.

Examples: State Bank of India and Punjab National Bank (public sector); HDFC Bank and ICICI Bank (private sector); and foreign banks operating in India.

Besides their main functions, commercial banks also provide agency services (collecting cheques, paying bills, buying and selling securities on behalf of customers) and general utility services (lockers, drafts, debit and credit cards, net banking).

Worked example

(2 marks) What is a commercial bank? How does it earn profit?

Try it first, then show the solutionSolution

1. A commercial bank accepts deposits from the public and lends money to individuals and businesses - 1 mark.
2. It earns profit mainly from the difference between the interest it charges on loans and the interest it pays on deposits - 1 mark.

Answer: A commercial bank is a financial institution that accepts deposits from the public and lends the money out. Its profit comes mainly from charging a higher rate of interest on loans than it pays on deposits.

Accepting deposits: types of deposits

1. Fixed (term) deposits: money deposited for a fixed period (from a few days to several years). It cannot be withdrawn before maturity without a penalty. The rate of interest is the highest, and it rises with the length of the period. Suited to those who want to save without needing the money soon.
2. Savings deposits: meant to encourage saving among households. Money can be withdrawn, though banks may limit the number of withdrawals; a moderate rate of interest is paid. Cheque books and debit cards are provided.
3. Current deposits: meant mainly for businesses that make many payments. Money can be deposited and withdrawn any number of times by cheque; usually no interest is paid, and the bank may charge for services. Current account holders can get an overdraft facility.
4. Recurring deposits: a fixed amount is deposited every month for a fixed period; interest is higher than on savings deposits. Useful for regular savers such as salaried people.

Demand deposits (current and savings) are repayable on demand; time deposits (fixed and recurring) are repayable after a fixed period.

Worked example

(3 marks) State three differences between demand deposits and fixed deposits.

Try it first, then show the solutionSolution

1. Withdrawal: demand deposits can be withdrawn at any time on demand; fixed deposits only after the fixed period (or with a penalty) - 1 mark.
2. Interest: demand deposits earn little (savings) or no (current) interest; fixed deposits earn the highest interest - 1 mark.
3. Purpose: demand deposits suit day-to-day transactions and businesses; fixed deposits suit long-term saving - 1 mark.

Answer: (1) Demand deposits can be withdrawn whenever the depositor wants; fixed deposits only on maturity. (2) Demand deposits earn low or no interest; fixed deposits earn the highest rate. (3) Demand deposits are for everyday transactions; fixed deposits are for saving for a fixed period.

Advancing loans: types and methods

Types of loans (brief):

• By period: short-term (for working capital), medium-term and long-term (for buildings and machinery).
• By security: secured loans (against gold, property, shares or goods) and unsecured loans (on personal guarantee).
• By purpose: personal loans such as housing, education and vehicle loans, and business loans.

Methods of advancing loans:
1. Loans: a fixed amount is sanctioned and credited to the borrower's account; interest is charged on the whole amount from the day of sanction, and it is repaid in one go or in instalments.
2. Cash credit: the borrower is allowed to withdraw money up to a fixed limit against security (such as stocks of goods) as and when needed; interest is charged only on the amount actually used.
3. Overdraft: a current account (demand deposit) holder is allowed to withdraw more than the balance in the account, up to an agreed limit, for a short period; interest is charged only on the overdrawn amount.
4. Discounting bills of exchange: the bank pays the holder of a bill of exchange its amount before the due date, after deducting a discount; on maturity the bank collects the full amount from the drawee.
5. Money at call and short notice: very short-term loans to other banks and financial institutions, repayable on demand or at short notice.

Worked example

(2 marks) Explain the overdraft facility given by a commercial bank.

Try it first, then show the solutionSolution

1. Overdraft is given to holders of a current (demand deposit) account - 1 mark.
2. They may withdraw more than their balance up to an agreed limit for a short period, paying interest only on the amount overdrawn - 1 mark.

Answer: An overdraft lets a current-account (demand-deposit) holder withdraw more than the balance in the account, up to a limit agreed with the bank, for a short period. Interest is charged only on the amount overdrawn and for the time it is used.

Credit creation

Commercial banks can create credit, that is, increase the total amount of deposits (and so money) in the economy, by lending.

Primary deposits: deposits made by customers in cash or by cheque. They are also called passive deposits because the bank simply receives them.
Derivative deposits: deposits created when a bank gives a loan and credits it to the borrower's account (or when the loan is spent and deposited in another bank). They are also called active deposits, because they arise from the bank's lending.

How credit is created (brief): a bank keeps only a fraction of its deposits as cash reserve (required by the central bank) and lends the rest. The loan is spent and comes back into the banking system as a deposit, part of which is again lent out, and so on. In this way total deposits become a multiple of the original primary deposit.
Simple illustration: if a bank receives a primary deposit of ₹1,000 and must keep 10 per cent as reserve, it can lend ₹900; when that ₹900 is deposited, ₹810 can be lent, and so on. Total deposits can reach up to ₹1,000 x (1 / 0.10) = ₹10,000.
Limits: the cash reserve ratio, the public's habit of holding cash, availability of good borrowers and securities, and central bank policy.

Worked example

(2 marks) Distinguish between primary deposits and derivative deposits.

Try it first, then show the solutionSolution

1. Primary deposits are cash or cheques deposited by customers; the bank receives them passively - 1 mark.
2. Derivative deposits are created by the bank when it lends and credits the loan to the borrower's account; they arise from lending - 1 mark.

Answer: Primary deposits are the cash or cheques that customers bring to the bank. Derivative deposits are created by the bank itself when it gives loans by crediting borrowers' accounts; they are the basis of credit creation.

Commercial bank versus central bank

1. Position: the central bank is the apex bank of the country; commercial banks work under its control.
2. Ownership: the central bank (the Reserve Bank of India) is owned by the government; commercial banks may be public, private or foreign.
3. Objective: the central bank works for monetary stability and public welfare, not profit; commercial banks aim at profit.
4. Dealings: the central bank deals with the government and banks, not with the public; commercial banks deal directly with the public.
5. Note issue: only the central bank can issue currency notes; commercial banks cannot.
6. Credit: the central bank controls credit; commercial banks create credit.
7. Number: there is one central bank; there are many commercial banks.

When writing differences, match each point: write the same basis for both banks in one line.

Worked example

(2 marks) Give two differences between a commercial bank and the central bank.

Try it first, then show the solutionSolution

1. Objective: a commercial bank aims at profit; the central bank works for monetary stability and public welfare - 1 mark.
2. Note issue: a commercial bank cannot issue currency notes; the central bank has the monopoly of note issue - 1 mark.

Answer: (1) A commercial bank works for profit, while the central bank works for monetary stability and public welfare. (2) Commercial banks cannot issue currency notes; the central bank alone issues them.

Commercial Banks in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Commercial Banks: Deposits and Loans
• Credit Creation: Primary and Derivative Deposits

Commercial Banks: key facts

Types of deposits

Fixed, savings, current, recurring

Demand deposits: current and savings; time deposits: fixed and recurring.

Methods of lending

Loans, cash credit, overdraft, discounting bills, money at call

Overdraft

Current account holder withdraws beyond balance up to a limit; interest on amount overdrawn

Credit creation (simple)

Maximum total deposits = primary deposit x (1 / reserve ratio)

Brief understanding only.

Primary vs derivative deposits

Primary = cash brought by customers; derivative = created by lending

How the board asks Commercial Banks

The question patterns to expect, and the method that works for each.

Tricks to remember Commercial Banks

Short memory aids. Say each one aloud once, then use it on a question the same day.

• F-S-C-R

  Fixed, Savings, Current, Recurring: 'Four Strong Crisp Rupees.'

  Use it when: Types of deposits.

• Overdraft = Over the balance

  Only current account holders draw over their balance.

  Use it when: Overdraft.

• Primary in, derivative out

  Primary deposits come in from customers; derivative deposits go out as loans and return as deposits.

  Use it when: Credit creation.

Commercial Banks: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section B style)

Read the situation, then answer every part. In the board paper this is a 10-mark question split into 2 + 3 + 5 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Commercial Banks

The slips examiners see most often, and what to write instead.

• ✗Mistake: Not linking overdraft to the current account

  CISCE examiners' comments, 2025: candidates left out the key term 'demand deposit' (current account) when explaining overdraft.

  ✓Do this: Begin: 'Overdraft is given to current-account holders...'

  Usually costs: 1 mark.

• ✗Mistake: Unmatched columns in differences

  CISCE examiners' comments, 2024: candidates failed to match corresponding columns when writing differences between commercial and central banks.

  ✓Do this: Write each basis (objective, dealings...) for both banks side by side.

  Usually costs: Up to 2-3 marks.

• ✗Mistake: Long unnecessary examples

  CISCE examiners' comments, 2024: candidates gave lengthy examples for overdraft.

  ✓Do this: Define precisely; a one-line example is enough.

  Usually costs: Time, and marks elsewhere.

• ✗Mistake: Unclear concepts in deposit differences

  CISCE examiners' comments, 2025: candidates differentiated demand and fixed deposits poorly because the concepts were unclear.

  ✓Do this: Compare on withdrawal, interest and purpose.

  Usually costs: 1 to 2 marks.

Practice questions on Commercial Banks

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   Which deposit requires a fixed amount to be deposited every month?
   (a) Fixed deposit
   (b) Recurring deposit
   (c) Current deposit
   (d) Savings deposit

   Hint

   Monthly.

   Answer

   (b) Recurring deposit.

2. Q2 · 1 mark · MCQBoard level

   Deposits created by a bank when it gives loans are called:
   (a) primary deposits
   (b) passive deposits
   (c) derivative deposits
   (d) time deposits

   Hint

   Created, not received.

   Answer

   (c) derivative deposits.

3. Q3 · 2 marks · Very short answerHarder board level

   Why do banks usually pay no interest on current deposits?

   Hint

   Constant withdrawals.

   Answer

   Because current accounts are used for frequent withdrawals, so banks must keep large cash reserves against them and cannot lend those funds profitably; they also provide many services to these accounts.

4. Q4 · 2 marks · Very short answerBoard level

   What is meant by discounting of bills of exchange?

   Hint

   Paying before maturity.

   Answer

   It is a method of lending in which the bank pays the holder of a bill of exchange its value before the due date, after deducting a discount, and collects the full amount from the drawee on maturity.

5. Q5 · 2 marks · Very short answerHarder board level

   State two agency functions of commercial banks.

   Hint

   On behalf of customers.

   Answer

   Collecting cheques and dividends for customers, and paying bills, insurance premiums or taxes on their behalf (also buying and selling securities).

6. Q6 · 5 marks · Long answerBoard level

   Explain any four types of deposits accepted by commercial banks.

   Hint

   F-S-C-R.

   Answer

   Fixed deposits: for a fixed period, highest interest, early withdrawal penalised. Savings deposits: for households, moderate interest, some withdrawal limits. Current deposits: for businesses, unlimited withdrawals by cheque, no interest, overdraft available. Recurring deposits: fixed monthly sums for a fixed period, higher interest than savings.

7. Q7 · 3 marks · Short answerHOTS / competency

   What limits a bank's ability to create credit? Give three factors.

   Hint

   Reserves and borrowers.

   Answer

   (1) The cash reserve ratio fixed by the central bank: a higher ratio means less lending. (2) The public's habit of holding cash rather than depositing it. (3) The availability of creditworthy borrowers and acceptable securities (also central bank policy).

8. Q8 · 2 marks · Very short answerHOTS / competency

   'Commercial banks are dealers in money and credit.' Explain.

   Hint

   Borrow and lend.

   Answer

   They borrow money from the public as deposits and lend it as loans, and through lending they create credit (derivative deposits), so they deal in both money and credit.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Which account gets overdraft?Show answer

   The current account.

2. 2.What are derivative deposits?Show answer

   Deposits created by banks through lending.

3. 3.Which deposit pays no interest?Show answer

   Current deposit (usually).

4. 4.What is cash credit?Show answer

   Borrowing up to a limit against security, with interest only on the amount used.

5. 5.Give the simple formula for maximum credit creation.Show answer

   Primary deposit x (1 / reserve ratio).

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Commercial bank: accepts deposits, lends for profit.
• ☐Deposits: fixed (highest interest), savings, current (no interest, overdraft), recurring (monthly).
• ☐Lending: loans, cash credit, overdraft, discounting bills, money at call.
• ☐Primary deposits (received) vs derivative deposits (created by lending).
• ☐Credit creation: lend, redeposit, relend; limited by reserve ratio.
• ☐Vs central bank: profit vs welfare; public vs government/banks; no note issue vs monopoly.

Commercial Banks: frequently asked questions