Primary and Secondary Functions of Commercial Banks Explained
MCQs on the function of commercial banks are essential for students preparing for exams like CA Foundation, Banking, SSC, and school board assessments. Understanding commercial banks—financial institutions that accept deposits, provide loans, and drive economic activity—helps deepen your knowledge of both commerce exams and real-world finance.
| Function Type | Primary Functions | Secondary Functions |
|---|---|---|
| Examples |
|
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Functions of Commercial Banks MCQ
Commercial banks play a key role in financial management and economic growth. Their primary functions include accepting various forms of deposits and granting loans. Secondary functions include offering financial services like lockers and forex. MCQs on this topic are common in commerce exams and help clarify core banking concepts.
Primary Functions of Commercial Banks
The primary functions of commercial banks are central to their existence and service to the economy:
- Accepting deposits—savings, current, and fixed deposits
- Providing loans and advances to individuals and businesses
- Creating credit by lending more than received deposits
- Facilitating payment and settlement (cheques, drafts, NEFT/RTGS)
For more details, visit Functions of Commercial Banks.
Secondary Functions of Commercial Banks
Secondary functions make banks versatile and support the main functions:
- Acting as agents for payment/collection (e.g., utility bills, dividends)
- Providing safe deposit lockers
- Offering foreign exchange services
- Underwriting shares and debentures
Explore more in Types of Bank Accounts.
Objective MCQs on Functions of Commercial Banks
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Which of the following is a primary function of commercial banks?
A) Selling insurance
B) Accepting deposits
C) Providing lockers
D) Paying utility bills
Answer: B) Accepting deposits
Explanation: Accepting deposits is a basic activity. Other options are secondary or agency functions. -
The process by which banks lend more than their actual deposits is called:
A) Asset Management
B) Credit Creation
C) Repo Operation
D) Open Market Operation
Answer: B) Credit Creation
Explanation: Credit creation expands the money supply and is a unique commercial bank function. Learn more at Credit Creation by Commercial Bank. -
Which of the following is NOT performed by a commercial bank?
A) Printing currency notes
B) Granting loans
C) Accepting deposits
D) Discounting bills
Answer: A) Printing currency notes
Explanation: Printing currency is a central bank (RBI) function. -
Which is the largest commercial bank in India?
A) HDFC Bank
B) State Bank of India
C) Punjab National Bank
D) Axis Bank
Answer: B) State Bank of India
Explanation: State Bank of India (SBI) is the largest by assets and reach.
More on SBI: Commercial Banks and Financial Institutions -
What role does a commercial bank play in the payment system?
A) Collects taxes
B) Facilitates cheque/NEFT/RTGS payments
C) Issues government bonds
D) Controls monetary policy
Answer: B) Facilitates cheque/NEFT/RTGS payments
Explanation: Commercial banks enable day-to-day payments through multiple channels.
Concept Clarification: Central Bank vs Commercial Bank
Students often confuse the functions of central and commercial banks. Remember:
- Central bank (like RBI) regulates the country’s money supply, prints currency, and supervises commercial banks.
- Commercial banks interact directly with the public—taking deposits, giving loans, and offering financial services.
Banking in Practice: Real-World and Exam Examples
Modern commercial banks use digital platforms (UPI, net banking) to facilitate payments and offer instant loans. For instance, in a recent commerce exam, students were asked about the impact of RBI's CRR (Cash Reserve Ratio) policy on credit creation by banks. Such scenario-based questions test practical application of banking concepts.
| Scenario | Related Bank Function | MCQ Angle |
|---|---|---|
| UPI transaction via mobile app | Payment and Settlement | Service innovation, secondary function |
| Increase in CRR by RBI | Regulatory effect on lending | Credit control, exam-based scenario |
| Business obtaining a cash credit facility | Granting loans, financial intermediation | Primary function, real-world application |
Use in Exams and Everyday Life
Understanding the functions of commercial banks aids in school board exams, government or banking recruitment tests, and personal decision-making—like choosing the right account or understanding loan interest implications. At Vedantu, our commerce resources simplify these topics for practical learning.
Related Commerce Topics on Vedantu
- Functions of Commercial Banks
- Credit Creation by Commercial Bank
- Reserve Bank of India
- Difference between Central Bank and Commercial Bank
- Financial Market
- Functions of Money
- Types of Bank Accounts
- Commercial Paper
- Money and Banking
- Stock Exchange
In summary, mastering MCQs on the function of commercial banks strengthens your fundamentals for exams, interviews, and real-life transactions. Explore the broad range of Vedantu’s commerce content to gain clarity on deposits, credit creation, the payment system, and more. This ensures success in both academics and practical finance.
FAQs on MCQs on Functions of Commercial Banks with Answers
1. What are the functions of a commercial bank?
Commercial banks perform various crucial functions in the economy. They primarily act as financial intermediaries, accepting deposits and providing loans.
- Accepting Deposits: Gathering funds from individuals and businesses through various accounts like savings, current, and fixed deposits.
- Granting Loans & Advances: Lending money to individuals and businesses for various purposes like personal loans, home loans, and business finance.
- Credit Creation: Expanding the money supply by lending out a larger amount than the initial deposits.
- Payment Services: Facilitating payments through checks, demand drafts, electronic transfers, and other methods.
- Other Services: Offering additional services like lockers, forex transactions, credit cards, and investment products.
2. What is the difference between a central bank and a commercial bank?
Central banks and commercial banks have distinct roles. Central banks like the Reserve Bank of India (RBI) primarily regulate the monetary system and supervise commercial banks.
- Central Bank: Sets monetary policy (interest rates, reserve requirements), issues currency, and acts as the lender of last resort.
- Commercial Bank: Operates in the private sector, focusing on deposit mobilization, lending, and payment services.
3. What are the primary functions of a commercial bank MCQ?
The primary functions of a commercial bank are accepting deposits, providing loans and advances, and facilitating payments. These activities form the core of their business model.
- Deposit Mobilization: Attracting savings from the public through various deposit schemes.
- Credit Allocation: Providing funds to borrowers for investment and consumption needs.
- Payment System Management: Efficiently transferring funds between accounts and facilitating various payment methods.
4. What are the basic functions of a commercial bank mcqs?
Multiple-choice questions (MCQs) on commercial banks frequently assess understanding of their core functions.
- Deposit Acceptance: Banks attract deposits and provide accounts for customers.
- Credit Provision: Loans and advances are granted by commercial banks.
- Payment Services: Banks ensure an efficient payment transfer system.
- Other Services: This encompasses areas such as investment banking, currency exchange, etc.
5. Which of the following are functions of commercial banks?
Commercial banks perform a wide range of functions, encompassing both core banking services and supplementary offerings.
- Core Functions: Deposit taking, lending, and payment processing.
- Supplementary Functions: Providing investment advice, managing foreign exchange transactions, and offering other financial products.
6. What are the functions of a commercial banking unit of a bank?
A commercial banking unit within a larger bank operates within the broader scope of the bank's functions, concentrating on traditional banking services.
- Customer Accounts: Managing deposit accounts, credit facilities, and payment channels for individual and corporate clients.
- Loan Operations: Processing loan applications, monitoring repayments, and managing associated risks.
- Compliance: Adhering to all legal and regulatory guidelines.
7. How do commercial banks contribute to economic development?
Commercial banks play a vital role in economic growth by acting as key financial intermediaries.
- Capital Allocation: Directing savings towards productive investments by providing credit to businesses and individuals.
- Financial Inclusion: Expanding access to financial services, particularly to underserved populations.
- Economic Stability: Facilitating smooth transactions and ensuring efficient payment systems.
8. What is credit creation in banks?
Credit creation is a process where banks lend out a larger amount than their initial deposits, effectively multiplying the money supply.
- Fractional Reserve System: Banks are required to maintain a certain percentage of deposits as reserves, enabling them to lend out the rest.
- Money Multiplier Effect: This process creates a ripple effect, expanding the overall money supply in the economy.
- RBI Regulation: The Reserve Bank of India (RBI) regulates and monitors credit creation to ensure financial stability.
9. What are the limitations on credit creation by commercial banks?
While banks can create credit, several factors limit the extent of this capacity.
- Reserve Requirements: Banks must maintain a minimum percentage of deposits as reserves, limiting their lending capacity.
- Demand for Loans: Credit creation depends on the demand for loans from borrowers.
- Cash in Hand: The amount of physical cash available also restricts the banks' ability to lend.
- Monetary Policy: Central bank policies, such as interest rate adjustments, can influence the amount of credit available in the economy.
10. Which is the central bank of India mcq?
The central bank of India is the Reserve Bank of India (RBI). It plays a pivotal role in regulating the nation's financial system.
