MONEY AND BANKING

MONEY - Money s dened as everythng whch s generay accepted as

a medum of exchange and the same tme acts as the measure and
store of vaue.
Barter system makes the exchange process very nemcent and
dmcut.Money overcome the drawbacks of barer system n the
foowng manners-
OR
FUNCIONS OF MONEY ARE AS FOLLOWS-
OR
IMPORTANCE OF MONEY ARE AS FOLLOWS-
1)MEDIUM OF EXCHANGE- Use of money as a medum of exchange has
removed the probem of doube concdence of wants wherever
transactons takes pace wth the hep of money.
2)MEASURE OF VALUE- In barter system, there was no common
denomnatons to express ther exchange rato but money acts as a
measurng rod whch expresses the vaue of other commodtes, t
becomes easer to compare the reatve vaue of any two commodtes.
3)STORE OF VALUE- Under barter system, t was dmcut to store goods
for future use but money beng an assest can be stored for future use.
Money aso has the mert of genera acceptabty and ts vaue remans
stabe as compared to other goods.
4)STANDARD OF DEFERRRED PAYMENTS-Barter system acks a sutabe
standard of deferred payments whch makes the credt transactons
dmcut . Use of money as deferred payments has smped the
borrowng and endng transactons and aso resuted n capta
formaton.
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* MONEY SUPPLY- It refers to the tota voume of money hed by
the pubc at partcuar pont of tme n an economy.
IT IS A STOCK CONCEPT
There r 4 aternatve measures of money suppy, they r -
1 M1
2 M2
3 M3
4 M4
5 M1-It s the basc measure fo money suppy and comprses the
the currency hod by the pubc, demand deposts and other
deposts hed wth RBI
6 CURRENCY HOLD BY PUBLIC ncudes a cons and notes n
crcuaton
7 DEMAND DEPOSITS ncudes deposts hed by pubc wth
commerca banks.It aso ncudes cams of one banks wth
others.
8 OTHER DEPOSITS HELD WITH RBI ncudes deposts pubc
nanca nsttutons, nternatona nanca nsttutons, foregn
renta renderng to foregn govt. It does not ncudes deposts of
Indan govt and commerca banks wth RBI.
M2)-It s a broader concept than M1 as t n ncudes deposts wth
POST OFFICE SAVINGS BANKS. As post omce deposts are not
drawabe by checqes, they r not categorzed under ANK SAVINGS
DEPOSITS. Hence the concept of M2 was evoved.
M3)-It s a broader concept than M1, n addton to t aso ncudes
net tme deposts wth banks.
M4)- THIS measure of money suppy not ony ncudes a the tems
of M1 but aso deposts wth post omce and savngs bank.
***************************BANKING*************************
BANKS r categorzed as commerca n centra banks.
A COMERCIAL BANK performs the functons of acceptng deposts,
grantng oans n makng nvestments wth the ob|ectve of earnng
prot whereas
CENTRAL BANK s an apex body that contros, operates reguates n
drects the entre bankng and monetary structure of the country.
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9 CREDIT CREATION / MONEY CREATION BY COMMERCIAL BANKS
-:
It s one of the most mportant actvtes of the commerca
banks.Out of the tota deposts mobzed ,they r abe to create
credt by extendng oans and advances. Banks do not keep cent per
cent reserves aganst the deposts n order to meet the demand of
the depostors.
A BANKER KNOWS TWO THINGS-
1)- A the depostors w not wthdraw ther money smutaneousy.
2)- Borrowers w not wthdraw the entre amt n one go.
It means a ma|or part of ther deposts s consdered as IDLE
RESERVE.
A BANKER CANT AFFORD IDLE RESERVE DUE TO THE 3 REASONS-
10 Bank has to pay nterest on such deposts.
11 Bank has to meet admnstratve expenses (ke saares to the
empoyees) besdes earnng of the sharehoders.
12 Ide cash s unproductve and dont brng any ncome to the
bank.
So the comm. banks needs to extend oans n advances to the needy
persons out of ther de reserves and when a comm. banks grants a
oan , they dont gve the amt n cash nstead they open an account n
the name of the borrower n deposts the amt n t.
Banks have the power to create credt many tmes ther deposts.
EXAMPLE- Suppose a depostor MR. VIKASH WATSON has deposted Rs
1000 wth bank. Bank doesnt keep the entte depost wth tsef ,
rather ends amt. to a borrower MR. RAHUL GAUD after KEEPING 20%
OF THE DEPOSIT as CASH RESERVE RATIO (CRR) wth RBI . Now the
bank can end Rs 800 to MR. RAHUL GAUD , the bank doesnt ends
ths money by drawng checque or n cash ; t opens an account n the
name of MR. RAHUL GAUD and credts ths amt n hs acc. Once the
account s opened, t becomes a depost wth the bank whch can be
further ent out after keepng 20% of t as reserve wth the RBI. It
means now the bank can end RS 640 to an another borrower say MISS
ISHA and ths process w contnue unt the amt reaches to or nears to
zero.
ONE CAN FIND THAT WITH THE INITIAL DEPOSIT OF RS 1000, BANK IS
ABLE TO CREATE CREDIT WHICH IS MORE THAN RS 1000 .
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FUNCTIONS CENTRAL BANK OR RBI :-
1- BANK OF ISSUE-The centra bank s egay empowered to
ssue a the currency notes except 1 re con (t s ssued by the
MINISTERY OF FINANCE )
2- BANKER TO THE GOVT. -It acts as a BANKER , FINANCIAL
ADVISOR and AN AGENT TO THE GOVT.
AS A BANKER t carres on a the bankng busness
of the Govt .e. mantanng current accounts,
acceptng deposts, gvng oans and advances and
buyng and seng of securtes on behaf of the
govt.
AS A FINANCIAL ADVISOR t advces the govt. 4m
tme 2 tme on nanca and monetary matters.
AS AN AGENT t manages pubc debt, coect taxes
and other payments on behaf of the govt. n
represent govt. n INTERNATIONAL FINANCIAL
INSTITUTIONS.
3- BANKER AND SUPERVISO TO THE OTHER BANKS- THE
CENTRAL BANK FUNCTIONS IN 3 CAPACITIES-
AS A CUSTODIAN OF CASH RESERVE-It means
CENTRAL BANK mantans certan porton of the
reserves of the commerca banks (demand and
tme deposts)
AS A LENDER OF LAST RESORT---When comm.
Banks fas to meet ther nanca requrements 4m
other sources, they can approach to RBI/CENTRAL
BANK whch gves oans to them at a bank rate
CLEARING HOUSE-Snce centra banks mantans
CASH RESERVE of commerca banks ,hence they
acts as a cearng hose as t cears/settes cams of
one bank aganst others by makng Dr AND Cr
entres n ther accounts.
4- CUSTODIAN OF FOREIGN EXCHANGE RESREVE- RBI acts as a
custodan of countrys stock of god and other foegn
currences ( ke doars , pounds , yens ). Ths enabes RBI to
eXcercse a good contro on countrys foregn exchange.
5- CREDIT CONTROL---Through ths functon, the centra bank
nuences the eve and course of economc actvtes n the
country.
THERE R 2 WAYS BY WHICH CREDIT IS CONTROLLED BY
RBI---
OUALITATIVE METHOD AND OUANTITATIVE METHOD
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A) OUANTATIVE METHOD

OR
HOW RBI CONTROLS MONEY SUPPLY?
------Man quatatve methods r-----
13 BANK RATE-It s the rate of nterest charged by RBI
from the comm.. banks. Increase n bank rate means
cost of credt w go up. Increase n bank rate ncreases
the cost of credt as credt becomes costy. Its opposte
happens when there s a decrease n bank rate.
14 OPEN MARKET OPERATIONS- It refers to purchase and
sae of securtes n open market. When RBI ohers
securtes for sae , t reduces money suppy.
15 LEGAL RESERVE REOUIREMENTS-It refers to the mn.
%ge of tota deposts to be kept by commerca wth
themseves and wth RBI
WHEN MIN. %ge OF TOTAL DEPOSIT R KEPT BY COMM. WITH
THEMSELVES, IT IS CALLED SATUITORY LIOUIDITY RATIO (SLR)
WHEN MIN. %ge OF TOTAL DEPOSIT R KEPT BY COMM. WITH RBI, IT IS
CALLED CASH RESERVE RATIO (CRR)
B) OUALITATIVE METHODS-THERE R 3 TYPES OF OUALITATIVE
METHODS---
MARGIN REOUIREMENTS-It s the dherence
between the market vaue of securtes ohered and
the amt. of oan ent.In the stuaton of dect
demand ths margn s reduced 2 encourage
borrowngs.
CREDIT RATINING-It refers to the method of xng
maxmum mt on oans and advances gven by
the comm.. banks. Durng dect demand , t s
fted and durng excess demand t s mposed.
MORAL SUASION---It refers to the advce (n wrtten
or ora) ssued by the centra bank to the
commerca banks to reguate the ow of credt.
Durng the deaton RBI persuades comm.. banks to
expand the credt factes and durng naton , to
reduce the credt factes.
Page 5
GOVERNMENT
BUDGET AND
ECONOMY
GOVERNMENT BUDGET IS AN ANNUAL STATEMENT
SHOWING ITEMS WITH ESTIMATES OF RECEIPTS AND PAYMENTS
DURING THE FISCAL YEAR.
GOVERNMENT MAKES BUDGET IN ORDER TO FULFILL THE FOLLOWING
OB|ECTIVES------
16 Govt ams to Reduce the nequates of ncome and weath
through taxaton and expendture on soca securty and wefare.
17 Govt ams to Reaocate resources n accordance wth economc
and soca prortes of the country.
18 Govt ams to Mobze resources n such a way that savngs,
nvestments and hence economc growth s promoted.
19 Budget s prepared wth the ob|ectve of makng varous
Provsons for managng pubc enterprses and provdng them
nanca hep.
20 Budget s prepared wth the ob|ectve to reduce busness
Fuctuatons and mantan economc stabty.
(R2 MPF )
*COMPONENTS OF BUDGET---
IT HAS 2 COMPONENTS---
21 REVENUE BUDGET-It deas wth revenue aspects of the budget
and comprses of revenue recepts and revenue
expendture
22 CAPITAL BUDGET-It deas wth capta aspects of the budget
and comprses of capta recepts and capta
expendture.
PAGE 6

ON THE BASIS OF RECEIPTS AND EXPENDITURE , GOVT. BUDGET IS
CLASSIFIED AS BUDGET RECEIPTS AND BUDGET
EXPENDITURE
1)BUDGET RECEIPTS-It refers to the estmated
money recepts of the govt from a the sources. It comprses
of REVENUE RECEIPTS AND CAPITAL RECEIPTS.
23 ( A ) REVENUE RECEIPTS-It refers to those recepts
whch neither creates any abty nor any reducton
n assets of the govt.
EXAMPLE-Taxes or recepts from the tax abty of an
ndvdua or recepts from the sae shares of a pubc
enterprse.
REVENUE RECEIPTS ARE REGULAR AND RECURRING IN
NATURE
REVENUE RECEIPTS ARE CLASSIFIED INTO - TAX AND NON-
TAX RECEIPTS.
24 TAX-It s a compusory payment mposed on peope
and companes to meet the expendture ncurred by the
govt. for the common benet of the peope n the
country.
25 NON-TAX RECEIPTS--- It refers to the recepts from a
the sources other than tax recepts. EXAMPLE-nterest
receved on oan gven to state govt. and pvt.
Enterprses etc.
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26 ( B ) CAPITAL RECEIPTS-Ths refers to those recepts
whch either creates any abty or any reducton n
the assets of the govt.
EXAMPLE-BORROWINGS(IT LEADS TO INCREASE IN
LIABILITY) , SALE OF SHARES OF PUBLIC SECTOR UNITS
(IT LEADS TO REDUCTION IN ASSETS)
CAPITAL RECEIPTS ARE NON-RECURRING IN NATUTRE
CAPITAL RECEIPTS ARE CATEGORISED INTO---
27 BORROWINGS
28 RECOVERY OF LOANS
29 OTHER RECIPTS-Ths ncudes dsnvestments and
sma savngs.
30 BUDGET EXPENDITURE---It refers to the
expendtures of the govt. and comprses of revenue
expendture and capta expendture.
31 REVENUE EXPENDITUTE s the exp. Whch
nether creates any assests nor any reducton n the
abty.
EXAMPLE- PAYMENT OF SALARIES, PENSIONS,
EXP.ON ADMINISTRATIVE, DEFENCE, AND HEALTH
SERVICES ETC.
32 CAPITAL EXPENDITURE refers to those exp. Whch
ether creates any assests or any reducton n the
abty.
Exampe- Constructon of roads and yovers,
repayment of borrowngs etc.
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MEASUREMENT OF GOVT.
DEFICIT---:::
THERE R 3 TYPES OF DEFICITS--------
33 REVENUE DEFICIT
34 FISCAL DEFICIT
35 PRIMARY DEFICIT
1) REVENUE DEFICIT-
It s excess of revenue expendture over
revenue recepts
Its sgnes that the revenue recepts are
ess than revenue expendture and govt has
to make up ths dect through capta
recepts ( .e. through borrowngs or
dsnvestments)
Ths means ether ncrease n abty or
reducton n assets
It may aso eads to natonary stuatons n
an economy as hgh borrowngs ncrease the
future burden n terms of oans amt and
nterest payment.
It s a sgna to ether reduce xed
expendture or ncrease n revenue.
2) FISCAL DEFICIT---It refers to excess of tota
expendture over tota recepts excudng
borrowngs. It has to be nanced through
borrowng.
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IMPLICATIONS OF FISCAL DEFICIT-----:::
36 It eads to debt trap. It mpes tota borrowng whch
creates the probem of repayment of oans wth
nterest. Interest payment rases revenue expendture
whch eads to revenue dect. IT CREATES A VISCOUS
CIRCLE.
37 In order to meet the dect requrements, more
currency s prnted by RBI whch ncreases the money
crcuaton and money suppy and hence eadng to
naton
38 It ncreases of dependence of govt. on other countres.
39 It hampers economc growth.
3)PRIMARY DEFICIT---It s sca dect mnus (-) nterest
payment.
It ndcates how much govt borrowngs r gong to meet
the expenses other than the nterest payment. The
dherence between sca and prmary dect s nterest
payment on the borrowngs made n the past.
Zero or no prmary dect ndcates that nterest
commtment has forged the govt. to borrow.
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ADVISORY
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