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  1. 1. MONEY AND BANKINGMONEY- Money is defined as everything which is generally accepted asa medium of exchange and the same time acts as the measure andstore of value.Barter system makes the exchange process very inefficient anddifficult.Money overcome the drawbacks of barer system in thefollowing manners-ORFUNCIONS OF MONEY ARE AS FOLLOWS-ORIMPORTANCE OF MONEY ARE AS FOLLOWS-1)MEDIUM OF EXCHANGE- Use of money as a medium of exchange hasremoved the problem of double coincidence of wants wherevertransactions takes place with the help of money.2)MEASURE OF VALUE- In barter system, there was no commondenominations to express their exchange ratio but money acts as ameasuring rod which expresses the value of other commodities, itbecomes easier to compare the relative value of any two commodities.3)STORE OF VALUE- Under barter system, it was difficult to storegoods for future use but money being an assest can be stored forfuture use. Money also has the merit of general acceptability and itsvalue remains stable as compared to other goods.4)STANDARD OF DEFERRRED PAYMENTS-Barter system lacks asuitable standard of deferred payments which makes the credittransactions difficult . Use of money as deferred payments hassimplified the borrowing and lending transactions and also resulted incapital formation.Page 1
  2. 2. * MONEY SUPPLY- It refers to the total volume of money held bythe public at particular point of time in an economy.IT IS A STOCK CONCEPT There r 4 alternative measures of money supply, they r – 4 M1 5 M2 6 M3 7 M4 8 M1-It is the basic measure fo money supply and comprises the the currency hold by the public, demand deposits and other deposits held with RBI 9 CURRENCY HOLD BY PUBLIC includes all coins and notes in circulation 10 DEMAND DEPOSITS includes deposits held by public with commercial banks.It also includes claims of one banks with others. 11 OTHER DEPOSITS HELD WITH RBI includes deposits public financial institutions, international financial institutions, foreign rental rendering to foreign govt. It does not includes deposits of Indian govt and commercial banks with RBI. M2)-It is a broader concept than M1 as it in includes deposits with POST OFFICE SAVINGS BANKS. As post office deposits are not drawable by checqes, they r not categorized under ANK SAVINGS DEPOSITS. Hence the concept of M2 was evolved. M3)-It is a broader concept than M1, in addition to it also includes net time deposits with banks. M4)- THIS measure of money supply not only includes all the items of M1 but also deposits with post office and savings bank.*************************** BANKING ************************* BANKS r categorized as commercial n central banks. A COMERCIAL BANK performs the functions of accepting deposits, granting loans n making investments with the objective of earning profit whereas CENTRAL BANK is an apex body that controls, operates regulates n directs the entire banking and monetary structure of the country. Page 2
  3. 3. 12 CREDIT CREATION / MONEY CREATION BY COMMERCIAL BANKS -: It is one of the most important activities of the commercial banks.Out of the total deposits mobilized ,they r able to create credit by extending loans and advances. Banks do not keep cent per cent reserves against the deposits in order to meet the demand of the depositors. A BANKER KNOWS TWO THINGS- 1)- All the depositors will not withdraw their money simultaneously. 2)- Borrowers will not withdraw the entire amt in one go. It means a major part of their deposits is considered as IDLE RESERVE. A BANKER CANT AFFORD IDLE RESERVE DUE TO THE 3 REASONS- 13 Bank has to pay interest on such deposits. 14 Bank has to meet administrative expenses (like salaries to the employees) besides earning of the shareholders. 15 Idle cash is unproductive and don’t bring any income to the bank.So the comm. banks needs to extend loans n advances to the needypersons out of their idle reserves and when a comm. banks grants aloan , they don’t give the amt in cash instead they open an account inthe name of the borrower n deposits the amt in it.Banks have the power to create credit many times their deposits.EXAMPLE- Suppose a depositor MR. VIKASH WATSON has deposited Rs1000 with bank. Bank doesn’t keep the entite deposit with itself ,rather lends amt. to a borrower MR. RAHUL GAUD after KEEPING 20%OF THE DEPOSIT as CASH RESERVE RATIO (CRR) with RBI . Now thebank can lend Rs 800 to MR. RAHUL GAUD , the bank doesn’t lendsthis money by drawing checque or in cash ; it opens an account in thename of MR. RAHUL GAUD and credits this amt in his acc. Once theaccount is opened, it becomes a deposit with the bank which can befurther lent out after keeping 20% of it as reserve with the RBI. Itmeans now the bank can lend RS 640 to an another borrower say MISSISHA and this process will continue until the amt reaches to or nears tozero.ONE CAN FIND THAT WITH THE INITIAL DEPOSIT OF RS 1000, BANKIS ABLE TO CREATE CREDIT WHICH IS MORE THAN RS 1000 .Page 3
  4. 4. FUNCTIONS CENTRAL BANK OR RBI :- 1- BANK OF ISSUE—The central bank is legally empowered to issue all the currency notes except 1 re con (it is issued 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 it carries on all the banking business of the Govt i.e. maintaining current accounts, accepting deposits, giving loans and advances and buying and selling of securities on behalf of the govt. • AS A FINANCIAL ADVISOR it advices the govt. 4m time 2 time on financial and monetary matters. • AS AN AGENT it manages public debt, collect taxes and other payments on behalf of the govt. n represent govt. in 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 maintains certain portion of the reserves of the commercial banks (demand and time deposits) • AS A LENDER OF LAST RESORT---When comm. Banks fails to meet their financial requirements 4m other sources, they can approach to RBI/CENTRAL BANK which gives loans to them at a bank rate • CLEARING HOUSE—Since central banks maintains CASH RESERVE of commercial banks ,hence they acts as a clearing hose as it clears/settles claims of one bank against others by making Dr AND Cr entries in their accounts. 4- CUSTODIAN OF FOREIGN EXCHANGE RESREVE— RBI acts as a custodian of country’s stock of gold and other foeign currencies ( like dollars , pounds , yens ). This enables RBI to eXcercise a good control on country’s foreign exchange. 5- CREDIT CONTROL---Through this function, the central bank influences the level and course of economic activities in the country. THERE R 2 WAYS BY WHICH CREDIT IS CONTROLLED BY RBI--- QUALITATIVE METHOD AND QUANTITATIVE METHOD Page 4
  5. 5. A) QUANTATIVE METHOD OR HOW RBI CONTROLS MONEY SUPPLY? ------Main qualitative methods r----- 16 BANK RATE—It is the rate of interest charged by RBI from the comm.. banks. Increase in bank rate means cost of credit will go up. Increase in bank rate increases the cost of credit as credit becomes costly. Its opposite happens when there is a decrease in bank rate. 17 OPEN MARKET OPERATIONS- It refers to purchase and sale of securities in open market. When RBI offers securities for sale , it reduces money supply. 18 LEGAL RESERVE REQUIREMENTS—It refers to the min. %ge of total deposits to be kept by commercial with themselves and with RBIWHEN MIN. %ge OF TOTAL DEPOSIT R KEPT BY COMM. WITHTHEMSELVES, IT IS CALLED SATUITORY LIQUIDITY RATIO (SLR)WHEN MIN. %ge OF TOTAL DEPOSIT R KEPT BY COMM. WITH RBI, IT ISCALLED CASH RESERVE RATIO (CRR) B) QUALITATIVE METHODS—THERE R 3 TYPES OF QUALITATIVE METHODS--- • MARGIN REQUIREMENTS—It is the difference between the market value of securities offered and the amt. of loan lent.In the situation of deficit demand this margini s reduced 2 encourage borrowings. • CREDIT RATINING—It refers to the method of fixing maximum limit on loans and advances given by the comm.. banks. During deficit demand , it is lifted and during excess demand it is imposed. • MORAL SUASION---It refers to the advice (in written or oral) issued by the central bank to the commercial banks to regulate the flow of credit. During the deflation RBI persuades comm.. banks to expand the credit facilities and during inflation , to reduce the credit facilities.Page 5
  6. 6. GOVERNMENT BUDGETAND ECONOMYGOVERNMENT BUDGET IS AN ANNUAL STATEMENTSHOWING ITEMS WITH ESTIMATES OF RECEIPTS AND PAYMENTSDURING THE FISCAL YEAR.GOVERNMENT MAKES BUDGET IN ORDER TO FULFILL THEFOLLOWING OBJECTIVES------ 19 Govt aims to Reduce the inequalities of income and wealth through taxation and expenditure on social security and welfare. 20 Govt aims to Reallocate resources in accordance with economic and social priorities of the country. 21 Govt aims to Mobilize resources in such a way that savings, investments and hence economic growth is promoted. 22 Budget is prepared with the objective of making various Provisions for managing public enterprises and providing them financial help. 23 Budget is prepared with the objective to reduce business Fluctuations and maintain economic stability.(R2 MPF )*COMPONENTS OF BUDGET---IT HAS 2 COMPONENTS--- 24 REVENUE BUDGET—It deals with revenue aspects of the budget and comprises of revenue receipts and revenue expenditure 25 CAPITAL BUDGET—It deals with capital aspects of the budget and comprises of capital receipts and capital expenditure. PAGE 6
  7. 7. ON THE BASIS OF RECEIPTS AND EXPENDITURE , GOVT. BUDGET ISCLASSIFIED AS BUDGET RECEIPTS AND BUDGETEXPENDITURE1)BUDGET RECEIPTS—It refers to the estimated money receiptsof the govt from all the sources. It comprises of REVENUE RECEIPTSAND CAPITAL RECEIPTS. 26 ( A ) REVENUE RECEIPTS—It refers to those receipts which neither creates any liability nor any reduction in assets of the govt. EXAMPLE—Taxes or receipts from the tax liability of an individual or receipts from the sale shares of a public enterprise. REVENUE RECEIPTS ARE REGULAR AND RECURRING IN NATURE REVENUE RECEIPTS ARE CLASSIFIED INTO – TAX AND NON-TAX RECEIPTS. 27 TAX—It is a compulsory payment imposed on people and companies to meet the expenditure incurred by the govt. for the common benefit of the people in the country. 28NON-TAX RECEIPTS--- It refers to the receipts from all the sources other than tax receipts. EXAMPLE—interest received on loan given to state govt. and pvt. Enterprises etc.Page 7 29 ( B ) CAPITAL RECEIPTS—This refers to those receipts which either creates any liability or any reduction in the assets of the govt.
  8. 8. 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 NATUTRECAPITAL RECEIPTS ARE CATEGORISED INTO--- 30BORROWINGS 31RECOVERY OF LOANS 32 OTHER RECIPTS—This includes disinvestments and small savings. 33 BUDGET EXPENDITURE---It refers to the expenditures of the govt. and comprises of revenue expenditure and capital expenditure. 34 REVENUE EXPENDITUTE is the exp. Which neither creates any assests nor any reduction in the liability. EXAMPLE- PAYMENT OF SALARIES, PENSIONS, EXP.ON ADMINISTRATIVE, DEFENCE, AND HEALTH SERVICES ETC. 35CAPITAL EXPENDITURE refers to those exp. Which either creates any assests or any reduction in the liability. Example- Construction of roads and flyovers, repayment of borrowings etc. Page 8 MEASUREMENT OF GOVT. DEFICIT---::: THERE R 3 TYPES OF DEFICITS--------
  9. 9. 36REVENUE DEFICIT 37FISCAL DEFICIT 38PRIMARY DEFICIT 1) REVENUE DEFICIT— • It is excess of revenue expenditure over revenue receipts • Its signifies that the revenue receipts are less than revenue expenditure and govt has to make up this deficit through capital receipts ( i.e. through borrowings or disinvestments) • This means either increase in liability or reduction in assets • It may also leads to inflationary situations in an economy as high borrowings increase the future burden in terms of loan’s amt and interest payment. • It is a signal to either reduce fixed expenditure or increase in revenue. 2) FISCAL DEFICIT---It refers to excess of total expenditure over total receipts excluding borrowings. It has to be financed through borrowing.Page 9IMPLICATIONS OF FISCAL DEFICIT-----::: 39It leads to debt trap. It implies total borrowing which creates the problem of repayment of loans with
  10. 10. interest. Interest payment raises revenue expenditure which leads to revenue deficit. IT CREATES A VISCOUS CIRCLE. 40In order to meet the deficit requirements, more currency is printed by RBI which increases the money circulation and money supply and hence leading to inflation 41It increases of dependence of govt. on other countries. 42It hampers economic growth. 3)PRIMARY DEFICIT---It is fiscal deficit minus (-) interest payment. It indicates how much govt borrowings r going to meet the expenses other than the interest payment. The difference between fiscal and primary deficit is interest payment on the borrowings made in the past. Zero or no primary deficit indicates that interest commitment has forged the govt. to borrow. -------------------------------------------------------0------------------------------------------------Page 10 ADVISORY
  11. 11. Each and every word in the notes are VVI so don’t dare to skip anycontent.For further assistance and help , feel free to contact the undersigned 27x7on the following contacts----------+91-9716839380011-22611858139-HPOCKET A 3MAYUR VIHAR PHASE 3DELHI 1100096axthedevil@gmail.comax_ashwin2006@rediffmail.comashwintheax@gmail.comax_devil27@yahoo.comWWW.TWITTER.CO/DEVILAXSd/-ASHWIN PATEL aka DEVIL Ax