Money Banking and Commercial Banking
Money is an important and indispensable element of modern civilization. In ordinary usage, what we use to pay for things is called money. To a layman, thus, in India, the rupee is the money, in England the pound is the money.
Definition of Money
Traditionally, money has been defined on the basis of its general acceptability and its functional aspects. Thus, any thing which performed the following three function:
Served as medium of exchange
Served as a common measure of value
Served as a store of values was termed as money.
According to modern economist or empiricists, however the crucial function of money is that it serves as a store of value. It thus includes not only currencies and demand deposits of banks, but also includes a host of financial assets such as bonds, government securities, time deposits of banks and equity shares which serve as a store of value.
Some economists categories these financial assets as near money, distinct from pure money which refers to cash and chequable deposits with commercial banks. To them, money is what money does. In terms of financial assets it is termed as stability of the demand function, high degree of substitutability and feasibility of measuring statistical variation.
Functions of Money
In a Static Sense
As a medium of exchange: As a mean of payment.
As a unit of account: Money is a common measure or common denominator of value.
As Standard of deferred payment. Money is a unit in term of which debts and future transactions can be settled.
As a Store of Value: Keeping for future purpose.
In dynamic sense
Direct economic trends: Money directs idle resources into productive channels and there by affects output, employment, consumption and consequently economic welfare of the community at large.
As encouragement to division of labour: In a money economy, different people tend to specialize in the different goods and through the marketing process, these goods are bought and sold for the satisfaction of multiple wants.
Smoothens transformation of savings into investment: In a modern economy, savings and investment are done by two different sets of people-households and firms. Households save and firms invest. Saved money thus can be channelised into any productive investment.
The main features of Commercial Bank
It helps to mobilize the savings of the community
To make them available to the entrepreneurs
To ensure safety with liquidity
Bank assures all the above facilities further that the funds can be drawn back in case of need.
Bank act as bridge between the user of capital and those who save but cannot use the funds themselves. The ideal resources is converted in to productive use
Role of Commercial Bank
A developing economy require a high rate of capital formation to accelerate the tempo of economic development. But the economic development depends on rate of savings. Banks offer factilies to encourage savings.
Not only mobilize savings done by several household and make them available for production and investment to entrepreneurs in various sector of the economy.
Banks helps to increase the aggregate rate of investment in the economy.
Commercial banks helps in maximum social return and this ensure optimum utilization of savings and social welfare to help desirable sector such as agriculture, small scale industry, and weaker section of society
Function of a Bank
Receipt of Deposits: Like Demand deposit or current deposit, saving deposit and fixed deposit or time deposit.
Lending of money: Lending to Industrial and commercial purpose. It may be cash credit, overdrafts, loan and advances or discounting of bills of exchange. Interest rate vary according to amount and period.
- Collection of bills, promissory notes and cheques.
- Collection of dividends, interest premiums
- Purchase and sales of shares and securities
- Acting as trustee
- Making regular payment such as insurance premium.
- General Economics: Money & Banking,
- Issue of letters of credit, travellers cheques, bank draft, Circular notes.
- Safe keeping of valuable in safe deposit vaults
- Supplying trade information and statistics conducting economic survey
- Preparation of feasibility studies, project report etc.
- General Economics: Money & Banking,
Causes for Nationalisation
Private ownership of commercial banks and concentration of economic power
Neglect of agriculture sector
Violations of norms
Neglects of priority sector.
Objectives of Nationalization
Removal of control by a few
Provision of adequate credit to agriculture and small scale industry
Giving a professional bent to management
Encouragement of a new class of entrepreneurs.
Provision of adequate training and as well as terms of services to bank staff.
Drawback of Commercial Bank
Growth is less
Quality service is poor
No proper experts to improve public sector banks.
Solve the Drawback
Spreading the activities in remote areas
Keeping up their profitability
Looking after the growing needs of the priority sector of the economy.
Improving the performance of rural/semi-urban branches
Improving the quality of loan portfolio.
Meaning and Functions of Central Bank
A central bank is one which constitutes the apex of the monetary and banking structure of a country and which performs, in the national economic interest.
Function of Central Bank
The following function are
Issue of currency
Bankers to the government
Custodian of foreign exchange reserves
Controller of credit
Collection and publications of data.
Commercial Banks Vs Central Bank
Other banks are largely profit seeking institutions, the central bank is not so.
The central bank acts as the organ of the state.
Other bank have largely public dealings, the central bank’s dealing are with governments, central and state banks and other financial institutions.
Quantitative or General Measures
Qualitative or Selective Measures
Quantitative or general measures act as a weapons have a general effect on credit regulation. They are used for changing the total volume of credit in the economy. Quantitative measures consist of (a) Bank rate policy (b) Open market operations and (c) Variable reserve requirements.
Bank rate Policy
The bank rate is the rate at which the central bank discounts the bills of commercial banks. When the central bank wishes to control credit and inflation in the economy, it raises the bank rate. Increased bank rate increases the cost of borrowings of the commercial banks who in turn charge a higher rate of interest from their borrowers. This means the price of credit will increase. On the other hand, if the central bank wishes to boost production and investment activities in the economy, it will decrease the bank rate.
Open market operation
Open market operation imply deliberate direct sales and purchases of securities and bills in the market by the central bank on its own initiative to control the volume of credit. When the central bank sells securities in the open market other things being equal, the cash reserves of the commercial banks decrease to the extent that they purchases these securities. On the other hand, open market purchase of securities by the central bank lead to an expansion of credit made possible by strengthening the cash reserves of the banks.
Variable reserve ratio
There are two types of reserves which the commercial banks are generally required to maintain 1. Cash reserve ratio, 2. Statutory liquidity ration. Cash reserve ratio refers to that portion of total deposits which a commercial bank has to keep with the central bank in the form of cash reserves. Statutory liquidity ratio refers to that portion of total deposits which a commercial bank has to keep with itself in the form of liquid assets viz- cash, gold or approved government securities.
Qualitative or selective measure are generally meant to regulate credit for specific purposes. The central bank generally use the following forms of credit control.
Securing loan regulation by fixation of margin requirements
The central bank is empowered to fix the margin and thereby fix the maximum amount which the purchaser of securities may borrow against those securities. Raising of margin curbs the borrowing capacity of the security holder. This is a very effective selective control device to control credit in the speculative sphere without, at the same time, limiting the availability of credit in other productive fields.
Consumer credit regulation
The regulation of consumer credit consist of laying down rules regarding down payments and maximum maturities of installment credit for the purchase of specified durable consumer goods. Raising the required down payment limits and shortening of maximum period tend to reduce the demand for such loans and thereby check consumer credit.
Issue of directives
The central bank also uses directives to various commercial banks. These directives are usually in the form of oral or written statements, appeals, or warning, particularly to curb individual credit structure and to restrain the
aggregate volume of loans.
Rationing of credit
Rationing of credit is a selective method adopted by the central bank for controlling and regulating the purpose for which credit is granted or allocated by commercial banks.
Moral suasion implies persuasion and request made by the central bank to the commercial banks to co-operate with the general monetary policy of the former. The central bank may also persuade or request commercial banks not to apply for further accommodation from it or not to finance speculative or non-essential activities. Moral suasion is a psychological means of controlling credit; it is a purely informal and milder form of selective credit control.
The central bank may take direct action against the erring commercial banks, It may refuse to rediscount their papers, and give excess credit, or it may charge a penal rate of interest over and above the bank rate, for the credit demanded beyond a prescribed limit. By making frequent changes in monetary policy, it ensures that the monetary system in the economy functions according to the nation’s needs and goals.
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