MONEY AND ITS FUNCTIONS

Chapter 6

Definition of Money

"Anything that is generally acceptable as a means of exchange and which at the same time acts as a measure and store of value."

Functions of Money

Medium of exchange Measure of value Store of value Standard or Deferred payment Transfer of value

BANKING AND ITS FUNCTIONS

What is a Bank ? Introduction

The term bank is derived from the French word Banco which means a Bench or Money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging. Definition of a Bank Oxford Dictionary defines a bank as "an establishment for custody of money, which it pays out on customer's order."

Characteristics / Features of a Bank

1. Dealing in Money 2. Individual / Firm / Company 3. Acceptance of Deposit 4. Giving Advances 5. Payment and Withdrawal 6. Agency and Utility Services 7. Profit and Service Orientation 8. Ever increasing Functions 9. Connecting link 10. Banking Business 11. Name Identity

What are the Functions of Banks?

TYPES OF BANKS

Structure of banking sector in India

RESERVE BANK OF INDIA AND ITS FUNCTIONS

INTRODUCTION

The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted for the need of following: To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.

FUNCTIONS OF RBI

FUNCTIONS OF RBI

Monetary policy Regulation and supervision of the banking and non-banking financial institutions, including credit information companies Regulation of money, forex and government securities markets as also certain financial derivatives Debt and cash management for Central and State Governments Management of foreign exchange reserves Foreign exchange managementcurrent and capital account management

Banker to banks Banker to the Central and State Governments Oversight of the payment and settlement systems Currency management Developmental role Research and

MONETARY OPERATIONS OF RBI

Monetary operations involve monetary techniques which operate on monetary magnitudes such as money supply, interest rates and availability of credit aimed to maintain Price Stability, Stable exchange rate, Healthy Balance of Payment, Financial stability, Economic growth. RBI, the apex institute of India which monitors and regulates the monetary policy of the country stabilizes the price by controlling Inflation. RBI takes into account the following

Open Market Operations An open market operation is an instrument of monetary policy which involves buying or selling of government securities from or to the public and banks. Cash Reserve Ratio (CRR) CRR is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances .Higher the CRR with the RBI lower will be the liquidity in the system and vice-versa

Statutory Liquidity Ratio Every financial institution has to maintain a certain quantity of liquid assets with the RBI for time and demand liabilities. The ratio of the liquid assets to time and demand liabilities is termed as the SLR Bank Rate Policy Bank rate is the rate of interest charged by the RBI for providing funds or loans to the banking system.

Credit Ceiling In this operation RBI issues prior information or direction that loans to the commercial banks will be given up to a certain limit. Credit Authorization Scheme Credit Authorization Scheme was introduced in November, 1965 when P C Bhattacharya was the chairman of RBI. Under this instrument of credit regulation RBI as per the guideline authorizes the banks to advance loans to desired sectors

Moral Suasion Moral Suasion is just as a request by the RBI to the commercial banks to take so and so action and measures in so and so trend of the economy. Repo Rate and Reverse Repo Rate Repo rate is the rate at which RBI lends to commercial banks generally against government securities. Reverse Repo rate is the rate at which RBI borrows money from the commercial banks.

COMMERCIAL BANKS

MEANING AND DEFINITION

Commercial banks are an organization which normally performs certain financial transactions. It performs the twin task of accepting deposits from members of public and make advances to needy and worthy people form the society. According to the Indian Banking Company Act 1949, "A banking company means any company which transacts the business of banking . Banking means accepting for the purpose of lending of investment of deposits of money from the public, payable on demand or other wise and withdraw able by cheque, draft or otherwise."

Functions of Commercial Banks PRIMARY FUNCTIONS SECONDARY FUNCTIONS

ACCEPTING DEPOSITS MAKING ADVANCES CREDIT CREATION

Agency Functions :To make payment of rent, insurance premium, etc. To deal in foreign exchange transactions. To purchase and sell securities. To act as trusty, attorney, correspondent and executor. To accept tax proceeds and tax returns. General Utility Functions: To provide safety locker facility to customers. To provide money transfer facility. To issue traveler's cheque