Which of the following statements is NOT correct with respect to bank deposits?

Question

Question

This question was previously asked in

CRPF Head Constable Ministerial Official Paper (Held On: 24 Feb 2023 Shift 2)

The rate at which banks lend out their reserves to investors is called the lending rate.
Deposits are broadly of two types-demand deposits, payable by the banks on demand from the account holder, e.g. current and savings account deposits, and time deposits, which have a fixed period to maturity, e.g. fixed deposits.
The difference between the two rates, called 'liquidity', is the profit that is appropriated by the banks.
The rate of interest offered by the bank to deposit holders is called the borrowing rate.

Answer 1

The correct answer is option 3.

Key Points

The difference between the lending rate (the rate at which banks lend out their reserves) and the borrowing rate (the rate at which banks pay interest on deposits) is called the 'spread' or 'net interest margin', not 'liquidity'.
'Liquidity' refers to the ease with which assets can be converted into cash without significant loss of value.
The term 'liquidity' is used in banking to describe the ability to meet short-term obligations.
Bank profitability is typically derived from the 'spread' between the lending and borrowing rates, not from 'liquidity'.

Additional Information

Demand Deposits
- These are deposits that can be withdrawn by the account holder at any time without any prior notice to the bank.
- Examples include savings accounts and current accounts.
Time Deposits
- These are deposits that have a fixed term or period of maturity.
- Examples include fixed deposits and recurring deposits.
Lending Rate
- The interest rate charged by banks on loans given to borrowers.
- It is a major source of income for banks.
Borrowing Rate
- The interest rate paid by banks to depositors on their deposits.
- This rate is generally lower than the lending rate.