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.

Commercial Banks

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.                               
 Agency Service:

1. Collection of  bills,  promissory notes and cheques.
2. Collection of dividends, interest premiums
3. Purchase    and    sales    of    shares    and securities
4. Acting as trustee
5. Making regular payment such as insurance premium.
6. General Economics: Money & Banking,

 General Services:

1. Issue   of   letters   of   credit,   travellers cheques, bank draft, Circular notes.
2. Safe keeping of valuable in safe deposit vaults
3. Supplying      trade      information      and statistics conducting economic survey
4. Preparation of feasibility studies, project report etc.
5. General Economics: Money & Banking,

Causes for Nationalisation

 Private   ownership   of    commercial banks and concentration of economic power

 Urban-bias

 Neglect of agriculture sector

 Violations of norms

 Speculative activities

 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

 Regional imbalance

 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.

Central Bank

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
 Bankers bank
 Custodian of foreign exchange reserves
 Controller of credit
 Promotional function
 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.

 

 

Monetary Instrument

  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

 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.

Direct Action

 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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