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1. Money and Banking Chapter -6

2. Evolution of money Commodity money , metallic money, paper money, bank money Barter system Bank money Plastic money E-money

3. Barter – meaning and its inconveniences Direct exchange of goods without use of money is called barter exchange Economic exchanges without the medium of money are referred to as barter exchange C.C.Economy Commodity for commodity exchange

4. Inconveniences of Barter exchange Lack of double coincidence of wants Lack of common measures of value Lack of standard of deferred payment Difficulty in storing wealth Lack of divisibility

5. MONEY MONEY

6. Meaning of Money Anything which is generally accepted by the people in exchange of goods and services or in repayment of debts Money is anything that is commonly accepted as a medium of exchange

7. Functions of Money ‘ Money is a matter of functions four A medium, a measure , a standard , a store.’ To facilitate the exchange of goods and services and help in carrying out trade smoothly

8. Functions of money

9. Functional definition of money It is defined in terms of its function. Accordingly, money is that which money does It is based on the four functins of money – a medium , a measure , a standard, a store

10. Classification of money Standard and Token coins Credit money Fiat money Fiduciary money- Is the money which is accepted as money on the basis of trust that the issuer commands

11. Alternative mesures of money supply (money stock) M1= C+DD+OD M2 = M1 + saving deposits with post offices saving banks M3= M1 + Net time deposits of Banks M4 = M3 + total deposits with post office saving organization(excluding NSE)

12. Commercial Bank A commercial bank is a financial institution which performs the functions of accepting deposits from the public and giving loans for investment with the aim of earning profit.

13. Function of Commercial Bank Acceptance of deposits Demand deposits Time deposits

14. Function of Commercial Bank Advancing loans Discounting bills of exchange Overdraft facility

15. Function of Commercial Bank Agency function Transfer of funds Collection of funds Payments of various items Collection of dividend

16. Function of Commercial Bank Performance General Utility services Traveler's cheques Locker facility Underwriting securities issued by government, public or private bodies Purchases and sale of foreign exchange Money creation

17. Credit creation by commercial bank Credit creation by commercial banks is determined by two factors Primary deposits new deposit in cash by the people. Indirectly primary deposits reflect savings of the people in the banks . LRR( legal Reserve Ratio) minimum ratio of deposits which is legally compulsory for the commercial bank to keep as cash or in liquid form

18. Credit creation by commercial bank When banks receives cash deposit from the public, it keeps a fraction of deposits as cash reserve and uses the reaming amount for giving loan. In the process of giving loans, banks are able to create money(credit)through secondary deposits (demand deposits, are deposits which arise on account of loan given by the bank) RBI produces money while commercial banks increases the supply of money by creating credit which is also treated as money creation.

19. Process of money (credit) creation A man, say Madan , deposits ₹2,000 with a bank and the LRR is 10% Bank is required to keep only the minimum required ₹ 200 as LRR Now bank is free to lend the reaming amount ₹1800 The bank lends ₹ 1800 to , say Vinod , Actually not given in cash but only demand deposit account is opened in his name and the loan amount is credited to his account. Again 10% of Vinod deposit is kept by the bank as LRR and remain amount will be given as loan The process of credit creation goes on till derivative deposit (demand deposit) becomes 0

20. Total credit creation = initial deposit x 1/LRR

21. Money multiplier It is multiple by which total deposits increases due to initial deposit More the number of deposit and the amount of loan therein, more will be investment, in the economy leads to rise in national income through multiplier effect .

22. Central Bank The central bank is the apex institution of monetary and banking system of a country. In India the Central Bank is known as Reserve Bank of India which was established in 1935

23. Function of a Central Bank Issue of Currency/Bank of issue Banker to Government Banker’s bank and supervisor It is the custodian of their cash reserves. It is lender of last resort It acts as clearing house

24. Function of a Central Bank Controller of credit and money supply Exchange control Lender of last resort Custodian of foreign exchange Clearing house function Collection and publication of data

25. Comparison between Central Bank and Commercial Bank Central Bank Commercial Bank It is the apex bank in the money market of a country It is merely a unit in the banking structure of the country Its primary aim is general public welfare Its primary aim is to make profit It has the monopoly/absolute right to issue currency notes A commercial bank is statutorily denied this function It cannot deal with the public It directly deals with the public ad business firms It acts as a banker to the government It has no such responsibility towards the state It decides its monetary policy to realize economic stability and full employment in country It plays a supplementary role and is quite often regulated by the central bank It is custodian of nation’s Gold and Foreign Exchange Reserves It does not perform such function

26. Thank you