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Money and Banking |
👉Definition of Money :
It is anything which is generally accepted as a medium of exchange, measure of value, store of value and standard of deferred payments.
👉What is Money Supply ?
It refers to the total volume of money held by public at a particular point of time in an economy.
Measures of Money Supply :
(i) M (1) = Currency and coins with Public + Demand Deposits of Commercial Banks + Other Deposits with RBI
(ii) M (2) = M (1) + Savings deposits with Post Office Saving Bank
(iii) M (3) = M (1) + Net time deposits with banks
(iv) M (4) = M (3) + Total Deposits with Post Office Saving Bank (Excluding National Saving Certificate)
👉Commercial Bank
Commercial bank is an institution which performs the functions of accepting deposits, granting loans and making investments, with the aim of earning profits.
Functions :
1. Primary Functions :
(i) Accepting Deposits = It is the most important function of commercial banks. They accept deposits in several forms according to requirements of different sections of the society.
(a) Current Account Deposits or Demand Deposits = These deposits refer to those deposits which are repayable by the banks on demand.
(b) Fixed or Time Deposits = It refer to those deposits, in which the amount is deposited with the bank for a fixed period of time.
(c) Saving Deposits = These deposits combine features of both current account deposits and fixed deposits.
(ii) Advancing of Loans = The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves, the balance is given to needy borrowers and interest is charged from them, which is the main source of income for these banks.
(a) Cash Credit = It refers to a loan given to the borrower against his current assets like shares, stocks, bonds, etc.
(b) Demand Loans = It refer to those loans which can be recalled on demand by the bank at any time.
(c) Short-term Loans = They are given as personal loans against some collateral security.
2. Secondary Functions :
(i) Overdraft Facility = It refers to a facility in which a customer is allowed to overdraw his current account up to an agreed limit.
(ii) Discounting Bills of Exchange = it refers to a facility in which holder of a bill of exchange can get the bill discounted with bank before the maturity.
(iii) Agency Functions = Commercial banks also perform certain agency functions for their customers.
(a) Transfer of Funds = Banks provide the facility of economical and easy remittance of funds from place-to-place with the help of instruments like demand drafts, mail transfers, etc.
(b) Collection and Payment of Various Items = Commercial banks collect cheques, bills, interest, dividends, subscriptions, rents and other periodical receipts on behalf of their customers and also make payments of taxes, insurance premium, etc. on standing instructions of their clients.
(c) Purchase and Sale of Foreign Exchange = Some commercial banks are authorised by the central bank to deal in foreign exchange. They buy and sell foreign exchange on behalf of their customers and help in promoting international trade.
(d) Purchase and Sale of Securities = Commercial banks buy and sell stocks and shares of private companies as well as government securities on behalf of their customers.
(e) Income Tax Consultancy = They also give advice to their customers on matters relating to income tax and even prepare their income tax returns.
(f) Trustee and Executor = Commercial banks preserve the wills of their customers as trustees and execute them after their death as executors.
(g) Letters of Reference = They give information about the economic position of their customers to traders and provide the similar information about other traders to their customers.
(iv) General Utility Functions =
(a) Locker Facility = Commercial banks provide facility of safety vaults or lockers to keep valuable articles of customers in safe custody.
(b) Traveller's Cheques = Commercial banks issue traveller's cheques to their customers to avoid risk of taking cash during their journey.
(c) Letter of Credit = They also issue letters of credit to their customers to certify their creditworthiness.
(d) Underwriting Securities = Commercial banks also undertake the task of underwriting securities. As public has full faith in the creditworthiness of banks, public do not hesitate in buying the securities underwritten by banks.
(e) Collection of Statistics = Banks collect and publish statistics relating to trade, commerce and industry. Hence, they advice customers on financial matters.
👉Money Multiplier
It measures the amount of money that the Banks are able to create in the form of deposits with every unit of money it keeps as resrves.
Money Multiplier = 1 / LRR
👉Central Bank
It is an apex body that controls, operates, regulates and directs the entire banking and monetary structure of the country.
Functions :
1. Currency Authority (Bank of Issue) = Central Bank has the sole authority for issue of currency. In India, Reserve Bank of India (RBI) has the sole right of issuing paper currency notes (except one-rupee notes and coins, which are issued by Ministry of Finance).
2. Banker to the Government = The RBI acts as a banker, agent and a financial advisor to the Central Government and all the State Governments.
3. Banker's Bank and Supervisor = There are a number of commercial banks in a country. There should be some agency to regulate and supervise their proper functioning. Being the apex bank, the RBI acts as the banker to other banks. In this sense, it bears the same relationship with commercial banks as the latter maintains with the general public.
4. Controller of Money Supply and Credit = As RBI has the sole monopoly in currency issue, it can control credit and supply of money.
(a) Repo (Repurchase) Rate = It is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks to meet their short-term needs.
(b) Bank Rate (or Discount Rate) = It is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks to meet their long-term needs.
(c) Reverse Repo Rate = It is the rate at which RBI borrows money from commercial banks.
(d) Open Market Operations = It refers to buying and selling of government securities by the Central Bank from/to the public and commercial banks.
(e) Legal Reserve Requirements (or Variable Reserve Ratio Method) = According to Legal reserve requirements, commercial banks are obliged to maintain reserves. It is a very quick and direct method for controlling the credit creating power of commercial banks. Commercial Banks are required to maintain reserves on two accounts :
(i) Cash Reserve Ratio (CRR) = It refers to the minimum percentage of net demand and time liabilities, to be kept by commercial banks with the central bank.
(ii) Statutory Liquidity Ratio (SLR) = It refers to the minimum percentage of net demand and time liabilities which commercial banks are required to maintain with themselves.
(f) Margin Requirements = Margin is the difference between the amount of loan and market value of the security offered by the borrower against the loan.
(g) Moral Suasion = This is a combination of persuasion and pressure that Central Bank applies on other banks in order to get them act, in a manner, in line with its policy.
(h) Selective Credit Controls = The RBI gives directions to other banks to give credit for certain purposes to particular sectors.
5. Custodian of Foreign Exchange Reserves = The central bank also acts as the custodian of the country's stock of gold and reserves of foreign exchange. This function enables the central bank to exercise a reasonable control on foreign exchange. According to regulations of foreign exchange, all foreign exchange transactions must be routed through RBI.
👉Multiple Choice Questions (MCQs)
Que 1. Who regulates money supply ?
(a) Government of India (b) Reserve Bank of India
(c) Commercial Banks (d) Planning Commission
Ans. (b) Reserve Bank of India
Que 2. Which of the following is not a problem of barter system of exchange ?
(a) Store of Value (b) Double Coincidence of Wants
(c) Unit of Account (d) Unemployment
Ans. (d) Unemployment
Que 3. Money Supply includes _____________
(a) All Deposits in Banks (b) Only Demand Deposits in Banks
(c) Only Time Deposits in Banks (d) Currency with Banks
Ans. (b) Only Demand Deposits in Banks
Que 4. Supply of money refers to quantity of money :
(a) As on 31st March (b) During any specified period of time
(a) As on 31st March (b) During any specified period of time
(c) As on any point of time (d) During a fiscal year
Ans. (c) As on any point of time
Que 5. The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is called :
(a) Statutory liquidity ratio (b) Deposit ratio
(c) Cash reserve ratio (d) Legal reserve ratio
Ans. (c) Cash reserve ratio
Que 6. Which of the following agency is responsible for issuing Re 1 currency note in India ?
(a) Reserve Bank of India (b) Ministry of Commerce
(c) Ministry of Finance (d) Niti Aayog
Ans. (c) Ministry of Finance
Que 7. Demand deposits include :
(a) Saving account deposits and fixed deposits
(a) Saving account deposits and fixed deposits
(b) Saving account deposits and current account deposits
(c) Current account deposits and fixed deposits
(d) All types of deposits
Ans. (b) Saving account deposits and current account deposits
Que 8. Repo rate is the rate at which :
(a) Commercial Banks purchase government securities from the central bank
(b) Commercial Banks can take loans from the central bank
(c) Commercial Banks can keep their deposits with the central bank
(d) Short-term loans are given by commercial banks
Ans. (b) Commercial Banks can take loans from the central bank
Que 9. Which of the following is not a Quantitative Method of Credit Control ?
(a) Open Market Operation (b) Margin Requirements
(c) Variable Reserve Ratio (d) Bank Rate Policy
Ans. (b) Margin Requirements
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