Unit 5 Money and Banking

7/29/2019 Unit 5 Money and Banking

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Unit 5

A central bank, reserve bank, or monetary authority is an institution that manages a nation's

currency, money supply, and interest rates. Central banks also usually oversee the commercial

banking system of their respective countries. In contrast to a commercial bank, a central bank

possesses a monopoly on increasing the nation's monetary base, and usually also prints the

national currency, which usually serves as the nation's legal tender.[1][2]Examples includethe European Central Bank (ECB), the Federal Reserve of the United States, and the People's

Bank of China.

The primary function of a central bank is to manage the nation's money supply (monetary

policy), through active duties such as managing interest rates, setting the reserve requirement,

and acting as a lender of last resort to the banking sectorduring times of bank insolvency

orfinancial crisis. Central banks usually also have supervisory powers, intended to prevent

commercial banks and other financial institutions from reckless or fraudulent behavior. Central

banks in most developed nations are institutionally designed to be independent from political

interference.

FUNCTIONS OF CENTRAL BANK

Issue of Currency:

The Central Bank is given the monopoly of issuing currency in order to secure control over

volume currency and credit. These notes are circulated through out due country as legal tender

money. It has to keep a reserve in the form if gold and foreign securities as per the statutory

rules against the notes issued by it. It issues notes above Rs.2/-. One Rupee coins and other

small coins are issued by the mints of Government.

Bankers to Government:

Central Bank acts as the bank of Central and State governments. It carries out al banking

business of Government. Government keep their cash balances in the current account with

Central Bank. Similarly central bank accepts receipts and makes the payment on behalf of the

Government. Also Central bank carries out exchange, remittances and other banking operation

on behalf of Government. Central Bank gives the loans and advances for a short period to the

Governments. It also manages the public debt of the country.
http://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Monetary_basehttp://en.wikipedia.org/wiki/Legal_tenderhttp://en.wikipedia.org/wiki/Central_bank#cite_note-0http://en.wikipedia.org/wiki/Central_bank#cite_note-0http://en.wikipedia.org/wiki/Central_bank#cite_note-0http://en.wikipedia.org/wiki/European_Central_Bankhttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/People%27s_Bank_of_Chinahttp://en.wikipedia.org/wiki/People%27s_Bank_of_Chinahttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Reserve_requirementhttp://en.wikipedia.org/wiki/Lender_of_last_resorthttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Financial_crisishttp://en.wikipedia.org/wiki/Financial_crisishttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Lender_of_last_resorthttp://en.wikipedia.org/wiki/Reserve_requirementhttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/People%27s_Bank_of_Chinahttp://en.wikipedia.org/wiki/People%27s_Bank_of_Chinahttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/European_Central_Bankhttp://en.wikipedia.org/wiki/Central_bank#cite_note-0http://en.wikipedia.org/wiki/Central_bank#cite_note-0http://en.wikipedia.org/wiki/Legal_tenderhttp://en.wikipedia.org/wiki/Monetary_basehttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Money_supply


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Bankers Bank & Supervisor:

All the scheduled banks are controlled and supervised by the Central Bank. These banks are

required to keep certain percentage of their deposits with Central Bank. They can take loans

from the Central Bank.

Controller of Credit & Money Supply:

Central Bank regulates the supply of money and credit according to the interest of the country.

It follows various instruments like

(i) Bank rate,

(ii) Open Market operations

(iii) Cash reserve ratio,

(iv) Moral suasion

(v) Marginal requirements.

They are the instruments of Monitory policy

Exchange Control:

It maintains the external value of currency. Every citizen should deposit foreign currency they

earn with RBI and they can get foreign currency from RBI with application.

Lender of Last Resort:

Scheduled banks can take the loans by rediscounting first class bills or short term approved

securities, whenever they do not get funds from any other sources.

Custodian of Foreign Exchange Balance:


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Central Bank maintains the balance of foreign exchange gold and bullions.

Clearing house function:

ntral Bank clears the cheques received by a bank belongs to other banks issued by the customers without

delay.

Collection and publication of data:

It collects, completes the data regarding the other banks and publishes this information

.

EXAM paperWhat are the bases or elements of Credit

The word "credit" has been derived from a Latin word creditum. It meanstrust. Credit refers to

the ability to acquire something of value like goods, services, money, or securities at the present

time in return for a promise to pay at a certain future time. It involves risks. The possibility that

the borrower can not fulfill his promise due to circumstances beyond his control always exists.

In granting credit to borrowers, there are bases in evaluating their ability to pay and willingness

to pay:

Character. This refers to the personal integrity of the borrower. His determination to pay can be

evaluated by his past business record. Character also includes personal habits, attitudes, or

vices of the borrower.

Capacity. This has something to do with the managerial ability of the borrower. Could he use

wisely and efficiently his loan? Factors like responsibility, maturity and business competence of

the borrower determine his capacity to pay.

Capital. This refers to the resources owned by the borrower such as priorities. With such

properties, the ability of the borrower to obtain credit has become greater.

Collateral. Usually, the title of the land is required as a security of the loan. This is a safety

measure for the payment of the loan. Buildings, machines and other valuable properties are

used as collaterals.

Condition. Conditions in the community, industry, or the whole economy affect the ability of

borrowers to pay their loans. For example; peace and order, inflation, profitability of a project,

etc.

Advantages of a Credit Economy

1. Allows business firms to acquire cash loans by using their machines or buildings as security,

instead of selling a part of their physical properties to obtain money. They can also sell bonds to

generate more funds for their investment ventures.


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2. Dynamic and enterprising men have the opportunity to put up their enterprises through credit.

3. Government projects or programs can be funded through bonds or loans.

4. Credit accelerates production, employment, income, and consumption.

5. Permits low-income consumers to enjoy the consumption of goods and services sooner, likehouse and lot, appliances, and other consumer products.

Disadvantages of a Credit Economy

1. Heavy borrowings by the governments may likely lead into inflation. It requires competent and

dedicated monetary authorities, and the cooperation of top government officials to use properly

local and foreign loans.

2. Borrowing by the government may result to extravangance and inefficiency. This has been

noted by development economists on the credit performance of the developing countries.

3. Business errors in the use of credit funds have unfavorable chain effects on the whole

economy. Failure of some firms to settle their debts with other companies affect the latter to pay

their bank loans. In turn, the banks cannot pay their depositors.

4. Excessive loans from other countries by the government may likely be a burden to future

generation, unless such loans are wisely invested in the economy for the benefits of the

masses.

5. In some cases, credit reduces future consumption of debtors.

Documents

Unit 5 Money and Banking