In normal commercial banking operations, banks primarily earn interest income on which of the following types of financial products or activities?

Introduction / Context:
Banks perform several functions, including accepting deposits, granting loans, issuing instruments, and providing various services. A basic question in banking awareness is to understand where banks actually earn their main interest income. This question focuses on identifying the primary source of interest earnings in a commercial bank balance sheet.

Given Data / Assumptions:

• Banks accept deposits from customers.
• Banks grant loans and advances to individuals and businesses.
• Banks issue demand drafts and collect bills of exchange as services.
• The question asks specifically about interest income, not fee income or service charges.

Concept / Approach:
In banking, interest is a price paid for the use of money over time. Banks pay interest on many types of deposits and earn interest on loans and investments. The key here is that deposits are a liability on which banks usually pay interest to customers, while loans and advances are assets that generate interest income. Demand drafts and bill collection generally yield fees or commission rather than interest. Therefore, the correct option is the one that captures loans and advances granted by the bank.

Step-by-Step Solution:
Step 1: Identify which items in the options are assets and which are liabilities for the bank.Step 2: Deposits are liabilities; banks pay interest on them and do not earn interest from them.Step 3: Loans and advances are assets; borrowers pay interest to the bank for using this money.Step 4: Demand drafts and bill collection mainly generate service charges or commission, not core interest income.Step 5: Therefore, loans and advances granted to borrowers are the primary source of interest income.

Verification / Alternative check:
Reviewing a simplified income statement of a bank shows interest earned on advances and investments as a major component of income. Interest paid on deposits is recorded as expense. Commission and fee based services are listed separately under other income. This accounting treatment confirms that loans and advances are the main source of interest earnings.

Why Other Options Are Wrong:
Option A: Deposits are sources of funds on which banks often pay interest, so they represent an interest cost, not interest income.Option C: Issue of demand drafts yields commissions and fees, not significant interest income.Option D: Collection of bills of exchange is usually an agency service, giving commission rather than interest earnings.Option E: Rental income from bank premises is possible but is not interest; it is other operating income.

Common Pitfalls:
Learners sometimes think that deposits generate interest because the bank invests them, but they forget that from the bank perspective deposits are liabilities. Another pitfall is not distinguishing between interest and non interest income. To improve accuracy, always classify options as assets or liabilities and focus on where the bank charges interest to others.

Final Answer:
The correct answer is Loans and advances granted to borrowers.