Question

Which of the following makes a financial institution a bank?

• A. Accepting deposits
• B. Lending
• C. Accepting demand deposits
• D. Accepting time deposits

Hint:

Only banks can accept demand (chequable) deposits — the legal test of a bank.

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
Many financial institutions (post offices, NBFCs, cooperatives) accept deposits and lend money, so we need the feature that is unique to banks specifically.

Step 2: Why option C is correct:
Only commercial banks are legally permitted to accept demand deposits — deposits withdrawable on demand by cheque — which allows banks to create credit (the money-multiplier process). This chequable, on-demand feature is what distinguishes a bank from any other financial institution.

Step 3: Why option A is wrong:
Non-bank institutions (e.g. post office savings schemes, NBFCs) also accept deposits, so mere deposit-taking does not define a bank.

Step 4: Why option B is wrong:
Lending is done by many non-bank financial companies too, so lending alone is not the defining feature.

Step 5: Why option D is wrong:
Accepting time (fixed) deposits is also done by non-bank institutions like cooperative societies and post offices, so it is not unique to banks either.

Final Answer:
Accepting demand deposits is what makes a financial institution a bank.