What is known as the most profitable asset of a commercial bank?
-
- Investment at call and short-notice
- Loans and advances to its customers
- Accepting deposits
- None of the above
Correct Answer: Loans and advances to its customers
Answer Explanation
It is well known that loans and advances to customers are the most profitable assets of a commercial bank. This is because banks earn interest income from their loans and credit they extend to their customers. For banks, interest income from loans is a significant source of revenue and contributes to their profitability.
An interest rate on a loan is higher than the interest rate on a deposit when a bank lends money to a customer. The difference between the interest rates is referred to as the “spread” or “net interest margin.” The bank earns a profit from this spread, which helps to increase its profitability and adds to its bottom line.
Why the other options are not correct
a. Investment at call and short notice:
The bank invests in financial instruments that can be easily converted into cash within a short period of time. (a) Investment at call and short notice: This refers to investments that can be converted into cash within a short period of time. In spite of the fact that such investments may provide some returns, they are not among the most profitable assets for commercial banks.
They are generally less profitable compared to loans and advances to customers. In addition, these investments may not contribute as much to the bank’s profitability as its loan portfolio.
c. Accepting deposits:
Accepting deposits is one of the primary functions of a commercial bank, and it is essential for its liquidity and stability. Customers deposit money in a bank, which can then use the funds to extend loans and earn interest income. While accepting deposits is an important part of banking, it is not the most profitable asset for a bank to accept deposits alone.
In general, interest rates on deposits are lower than those on loans, resulting in a narrower interest rate spread.
d. None of the above:
Due to the fact that loans and advances to customers are indeed the most profitable asset of a commercial bank, option (d) is not the correct answer. Since option (b) – loans and advances – directly contributes to a bank’s profitability through interest income, this option implies that none of the options are correct.
Conclusion
Conclusion: In conclusion, the most profitable asset of a commercial bank is (b) loans and advances to its customers. These loans generate interest income for banks, and the interest rate spread between lending and borrowing rates contributes significantly to their profitability.
It is important for a bank to make investments at short notice or at call, but these activities do not result in as much profit as loans and advances. In order to ensure long-term financial sustainability, banks must expand their loan portfolio responsibly.
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