Economics • Banking & FinanceMedium
What does the term 'Narrow Banking' refer to in the context of banking systems?
A. A system where banks invest their deposits primarily in risk-free liquid assets like government securities rather than extending risky commercial loans✓ Correct Answer
B. Banks that operate exclusively within rural districts without metropolitan branches
C. Financial institutions that specialize only in providing short-term trade credit
D. An institutional model where banks lend exclusively to micro-enterprises
💡 Solution & Explanation
Narrow banking describes a system where financial institutions deploy their deposit collections into ultra-safe liquid instruments like government bonds instead of granting commercial loans. Traditional banking models rely heavily on risky lending to generate interest margins. Financial sector reforms frequently reference narrow banking as a tool to curb non-performing assets.
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