Money & Banking

Money :-

Money is something which facilitates the transaction of goods and services.

Definition of Money :-

Functional Definition :- Money is anything that acts as a medium of exchange, measure of value, store of value and standard for deferred payment

Money Supply:-

Total stock of money (currency notes, coins and demand deposit of banks) in circulation are held by the public at a given point of time.

Money Supply = Currency held by Public + Net Demand Deposits held by commercial banks

Banking

Central Bank :- The central bank is the apex institution of a country’s monetary system. The design and control of the country’s monetary policy is its main responsibility. India’s central bank is the Reserve Bank of India.

Functions of Central Bank :-

1) Currency Authority :- The central Bank is the sole authority for the issue of currency in the country. All the currency issued by the central bank is its monetary liability. This means that the central bank is obliged to back the currency with assets of equal value.

2) Banker to the government :- 

The central bank acts as the banker to the government of the country. It keeps the cash balances of the government and maintains its accounts. It gives advances to the government and also takes the responsibility of the sale of government securities. It also manages public debt and gives advice to the government on various financial matters.

3) Bankers Bank and supervisor :- As the banker to banks , the Central Bank holds a part of the cash reserves of banks, lends them short term funds and provides them with centralized clearing and remittance facilities.

Central bank acts as the banker to the banks in three ways: (i) custodian of the cash reserves of the commercial banks; (ii) as the lender of the last resort; and (iii) as clearing agent.

a) Custodian of cash reserves:-  Commercial banks must keep a certain proportion  of cash reserves with the central bank (CRR)

b) Lender of last resort: - When commercial banks fail to need their financial requirements from other sources, they approach Central Bank which gives loans and advances.

c) Clearing house: - Since the Central Bank holds the cash reserves of commercial banks it is easier and more convenient to act as clearing house of commercial banks.

4)Custodian of foreign exchange reserves.

Another important function of Central Bank is the custodian of foreign exchange reserves. Central Bank acts as custodian of country’s stock of gold and foreign exchange reserves.  It helps in stabilizing the external value of money and maintaining favourable balance of payments in the economy.

5) Controller of Money Supply and Credit :- The Central Bank controls the money supply and credit in the best interests of the economy by quantitative and qualitative instruments.

central bank has power to regulate the credit creation by commercial banks.

I) Quantitative Instrument :- 

A. Bank Rate Policy:- The bank rate is the rate at which the Central Bank lends funds as a lender of last resort to banks against approved securities or eligible bills of exchange.

Repo Rate: It is the rate at which the Central Bank lends to Commercial Banks for short term.

Reverse Repo Rate: Securities are acquired by the RBI from the commercial banks with a simultaneous commitment to re-sell them to the commercial banks at pre- determined rate and date.

B. Open Market Operations:- Open market operations is the buying and selling of government securities by the central bank from/to the public and banks on its own account. The sale of government securities to banks will have the effect of reducing their reserves.

C. Varying Reserve Requirements :- Banks are obliged to maintain reserves with the central bank on two accounts. One is the cash reserve ratio and the other is Statutory Liquidity Ratio. Varing CRR and SLR are tools of monetary and credit control.

II) qualitative Credit Control :- 

A) Imposing margin requirement on secured loans:- A margin is the difference between the amount of the loan and market value of the security offered by the borrower against the loan. The advantages of this instrument are manifold.

B) Moral Suasion :- This is a combination of persuasion and pressure that the Central Bank applies on the other banks in order to get them to fall in line with its policy.

C) Selective credit controls :- These can be applied in both a positive as well as a negative manner

Very Short Question /Answer

Q1. Define Central Bank. Write the name of Central Bank of India.

Ans. Central Bank designs and controls the monetary policy of the country. The name of Central Bank is Reserve Bank of India.

Q2. Which institution is responsible for the monetary policy of the country?

Ans. The Central bank is responsible for the monetary policy of the Country.

Q3. Name the institution which issued the currency notes of the country.

Ans. The Central Bank(Reserve Bank of India) issues the currency notes of the country.

Short Question Answer

Q1. Write the functions of Central Bank.

Ans. 1) Currency Authority 2) Banker to the government

3) Bankers Bank and supervisor

4) Controller of Money Supply and Credit

Q2. What is the meaning of Banking?

Ans. Banking is defined as the accepting for the purpose of landing or investment of deposits.

Q3. How the Bank rate control the credit?

Ans. Bank rate is the rate of interest at which Central bank lends to Commercial banks. By raising the bank rate central bank raises the

cost of borrowing. This forces the Commercial banks to raise in turn the rate of interest from the public. As lending rate rises demand for

loan for investment and other purposes falls.

Long Question Answer:-

Q1. Which is the Quantitative instrument to control the money supply and credit in the economy?

Ans. The Quantitative instrument to control the money supply and credit in the economy are 

1) Bank Rate policy – the bank rate is the rate at which the control bank lends funds as a lender of last resort to banks against approved securities.

2) Open market operation :- Open market operation is the buying and selling of government securities by the Central Bank from/to the public and bank on its own account.

3) Varying Reserve Requirements :- Banks are obliged to maintain reserves with the Central bank on two account. One is the cash reserve ratio and the other is Statutory Liquidity Ratio. Varing CRR and SLR are tools of monetary and credit control.

Q2. Write the Qualitative instruments to control the credit of the Central Bank.

Ans. The Qualitative instruments to control the credit of the Central Banks are :-

A) Imposing margin requirement on secured loans:- A margin is the difference between the amount of the loan and market value of the security offered by the borrower against the loan.

B) Moral Suasion :- This is a combination of persuasion and pressure that the Central Bank applies on the other banks in order to get them to fall in line with its policy.

C) Selective credit controls :- These can be applied in both a positive as well as a negative manner.

Q3. Write the two function of Central Bank

Ans. Function of Central Bank :-

1) Currency Authority :- The central Bank is the sole authority for the issue of currency in the country. All the currency issued by the central bank is its monetary liability. This means that the central

bank is obliged to back the currency with assets of equal value.

2) Banker to the government :- The central bank acts as a banker to the government both central as well as state governments. It carries out all the banking business of the government and the government keeps its cash balances on current account with the central bank.