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Commercial Banks: Deposits and Loans, ICSE Class 10

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EconomicsICSE Class 10 · Commercial Banks

Commercial Banks: Accepting Deposits and Advancing Loans (ICSE Class 10 Economics)

Updated 17 October 2026 · Fact-checked

A commercial bank accepts deposits from the public and lends them to earn profit. It accepts four types of deposits: savings, current, fixed (term) and recurring. It advances loans by methods such as loans, cash credit, overdraft and discounting of bills of exchange, and also lends for very short periods as money at call and short notice. Credit creation is its third main function.

Notice that the bank takes in four kinds of deposits and lends the money out in four ways, earning profit on the interest gap.

Illustration drawn for QuestionBuddy.

Understand Commercial Banks: Deposits and Loans

Meaning. A commercial bank is a financial institution that accepts deposits repayable on demand or after a fixed time, and lends and invests these funds to earn profit. Its income is the interest on loans minus the interest paid on deposits and expenses.

Types of deposits.
1. Savings deposit: for households; withdrawals are allowed but may be limited; moderate interest.
2. Current deposit: for businesses; any number of withdrawals; usually no interest; overdraft is possible.
3. Fixed (term) deposit: a lump sum kept for a fixed period; highest interest; early withdrawal attracts a penalty.
4. Recurring deposit: a fixed sum is deposited every month for a fixed period; interest higher than savings deposit.

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

Types of loans (brief). By period: short, medium and long term. By security: secured (against gold, property, goods) and unsecured. By purpose: personal (housing, education, vehicle) and business.

Methods of advancing loans.

  • Loan: a fixed amount is credited to the borrower; interest on the whole sum.
  • Cash credit: withdraw up to a limit against security; interest only on the amount used.
  • Overdraft: a current account holder may withdraw more than the balance, up to a limit, for a short period; interest on the overdrawn amount only.
  • Discounting bills of exchange: the bank pays the bill's holder the amount less a discount before it is due and collects the full amount at maturity.
  • Money at call and short notice: very short-term loans to other banks and institutions.

Cash credit versus overdraft. Cash credit is given against stock or goods and used by business as working capital; overdraft is given to current account holders against a good record or security, usually for a short time.

Commercial Banks: Deposits and Loans: key facts

Commercial bank (meaning)
  • Accepts deposits
  • Lends and invests
  • Aim: profit
Types of deposits
  • Savings
  • Current
  • Fixed
  • Recurring
Methods of lending
  • Loan
  • Cash credit
  • Overdraft
  • Discounting bills
  • Call money
Simple interest
Interest = Principal × Rate × Time ÷ 100
Time in years.

How to answer Commercial Banks: Deposits and Loans questions

Descriptive answers list the type and one defining feature. Simple numericals use interest on the amount used.

  1. 1For deposits, give purpose, withdrawal rule and interest level.
  2. 2For loans, state how interest is charged (whole sum or used amount).
  3. 3For overdraft or cash credit sums, use interest on the amount actually used only.
  4. 4Interest = P × R × T ÷ 100 with T in years (months ÷ 12).
  5. 5Compare two methods in a table when asked for difference.

Commercial Banks: Deposits and Loans in real life

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

A shop owner's overdraft

Suppose a stationery shop owner has ₹10,000 in her current account and needs to pay a supplier ₹25,000 today. Her bank allows an overdraft limit of ₹20,000 and charges 12% a year on the overdrawn amount.

How much is overdrawn and what is the interest for one month?

Try it first, then show the solutionSolution
  1. Overdrawn = 25,000 − 10,000 = ₹15,000, within the ₹20,000 limit.
  2. Interest for 1 month = 15,000 × 12 × (1/12) ÷ 100 = ₹150.
  3. Check: 12% of 15,000 = 1,800 per year; 1,800 ÷ 12 = 150.

Answer: ₹15,000 overdrawn; interest ₹150 for one month.

Memory hook: Overdraft: pay only on what you overdraw.

Tricks to remember Commercial Banks: Deposits and Loans

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

  • SCFR

    Savings, Current, Fixed, Recurring.

    Use it when: Deposits.

  • LCOD

    Loan, Cash credit, Overdraft, Discounting.

    Use it when: Loan methods.

  • Used, not sanctioned

    Cash credit and overdraft charge interest on the amount used.

    Use it when: Numericals.

Commercial Banks: Deposits and Loans: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Deposit type · 1 mark · MCQBoard level

Deposits meant for businesses with many payments, usually paying no interest, are:
(a) fixed
(b) recurring
(c) current
(d) savings

Try it first, then show the solutionSolution
  1. Business use with frequent withdrawals: current deposit.

Answer: (c)

Example 2: Two deposits · 2 marks · Short answerBoard level

Differentiate between a savings deposit and a fixed deposit on two bases. (2 marks)

Try it first, then show the solutionSolution
  1. Withdrawal: savings can be withdrawn (with limits); fixed only at maturity without penalty.
  2. Interest: savings lower; fixed higher.

Answer: Withdrawal rule and rate of interest.

Example 3: Cash credit sum · 3 marks · Short answerHarder board level

A trader is sanctioned cash credit of ₹5,00,000 at 10% a year, but uses only ₹2,00,000 for six months. Find the interest. (3 marks)

Try it first, then show the solutionSolution
  1. Interest is charged on the amount used: ₹2,00,000.
  2. Interest = 2,00,000 × 10 × 0.5 ÷ 100 = ₹10,000.
  3. Check: yearly interest 20,000; half year 10,000.

Answer: ₹10,000.

Example 4: Methods · 4 marks · Long answerHarder board level

Explain any three methods by which commercial banks advance loans. (4 marks)

Try it first, then show the solutionSolution
  1. Cash credit: limit against stock; interest on amount used.
  2. Overdraft: current account holder withdraws above balance up to a limit.
  3. Discounting a bill: pays the holder the bill's amount less a discount before due date.
  4. A plain loan: fixed sum credited, interest on the whole amount.

Answer: Any three of the above with the working.

Example 5: Fixed deposit comparison · 3 marks · Short answerHOTS / competency

Ritu puts ₹50,000 in a fixed deposit at 6% per year for 2 years (use simple interest as the question assumes), and her brother deposits ₹2,000 every month in a recurring deposit for 2 years. Find Ritu's interest and the total amount deposited by her brother. Which one is suited to a person who has a lump sum and who saves monthly? (3 marks)

Try it first, then show the solutionSolution
  1. Ritu's interest = 50,000 × 6 × 2 ÷ 100 = ₹6,000 (maturity ₹56,000).
  2. Brother's deposits = 2,000 × 24 = ₹48,000 (before interest).
  3. Lump sum: fixed deposit; regular monthly saver: recurring deposit.

Answer: ₹6,000; ₹48,000; fixed for lump sum and recurring for monthly savers.

Where students lose marks in Commercial Banks: Deposits and Loans

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

  • Mistake: Interest on sanctioned limit

    Cash credit sums.

    Wrong working

    Interest on ₹5,00,000.

    Right working

    Interest on ₹2,00,000 actually used.

    Do this: Read what was used.

    Usually costs: 1-2 marks.

  • Mistake: Months not converted

    Rate is yearly.

    Wrong working

    12% for 2 months means 24%.

    Right working

    Time = 2/12 years.

    Do this: Convert months to years.

    Usually costs: 1 mark.

  • Mistake: Mixing demand and time deposits

    Categories confused.

    Wrong working

    Fixed deposit is a demand deposit.

    Right working

    Fixed and recurring are time deposits.

    Do this: Learn the grouping.

    Usually costs: 1 mark.

Exam tips

  • A brief understanding is enough: one feature per type.
  • Use a table to compare cash credit and overdraft.
  • Show formula and unit in interest sums.

Practice questions on Commercial Banks: Deposits and Loans

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 · Very short answerBoard level

    Define a commercial bank. (1 mark)

    Hint

    Deposits and loans.

    Answer

    A financial institution that accepts deposits from the public and lends them to earn profit.

  2. Q2 · 1 mark · MCQBoard level

    Which deposit has the highest rate of interest?
    (a) Current
    (b) Savings
    (c) Fixed
    (d) Demand

    Hint

    Locked in time.

    Answer

    (c)

  3. Q3 · 3 marks · Short answerHarder board level

    What is an overdraft? Who can avail of it? (3 marks)

    Hint

    Current account.

    Answer

    An overdraft allows a current account holder to withdraw more than the balance, up to a limit, for a short time. Interest is charged on the overdrawn amount.

  4. Q4 · 3 marks · Short answerHarder board level

    A current account holder has a balance of ₹8,000 and withdraws ₹20,000 under an overdraft at 15% per year for 2 months. Find the interest. (3 marks)

    Hint

    Overdrawn amount only.

    Answer

    Overdrawn = 20,000 − 8,000 = ₹12,000. Interest = 12,000 × 15 × (2/12) ÷ 100 = ₹300.

  5. Q5 · 3 marks · Short answerHOTS / competency

    Suppose a small manufacturer needs funds for a bill of exchange due after 3 months. Explain how the bank can help immediately, and how the bank earns from it. (3 marks)

    Hint

    Discounting.

    Answer

    The bank discounts the bill: it pays the manufacturer the amount less a discount now. At maturity the bank collects the full amount; the discount is its earning.

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.Deposit with no interest for business?Show answer

    Current deposit.

  2. 2.Deposit with highest interest?Show answer

    Fixed.

  3. 3.Deposit made every month?Show answer

    Recurring.

  4. 4.Interest in overdraft charged on?Show answer

    Overdrawn amount.

  5. 5.Discounting bills means?Show answer

    Paying the bill holder before due date less discount.

Commercial Banks: Deposits and Loans: frequently asked questions

What are the functions of commercial banks?

Accepting deposits, advancing loans and creating credit.

What are the types of deposits?

Savings, current, fixed and recurring deposits.

What is cash credit?

A facility to withdraw up to a limit against security, with interest on the amount used.