Welcome to

Prof. Praveen Balduas

Free Smart Notes

Common Proficiency Test (CPT)
Subject
ECONOMICS

Topic:
Chapter 8: Money and Banking
(All Units)
Terms & Conditions
We have put a lot of work into developing all these smart notes and retain the copyright in them. Students
can use them freely providing that they do not redistribute or sell them.

Do
Use these smart notes for your
reference.
If you like these smart notes, we would
always appreciate a link back to our
website. Many thanks.


Dont
Resell or distribute these smart notes.
Put these smart notes on a website for
download. This includes uploading
them onto file sharing networks like
Slideshare, Myspace, Facebook, bit
torrent, Orkut etc.
Pass off any of our created content as
your own work.
Use these smart notes in any other
coaching classes or educational
institutions.

You can find many more free Smart Notes on the Praveen Sirs website
www.pravinsir.com

Praveen Balduas Smart Notes ECONOMICS CACPT

Prepared by: Praveen Baldua www.pravinsir.com/www.freecsnotes.com Page 1

CHAPTER 8 UNIT 1
MONEY

1.0] MEANING OF MONEY:
In layman terms, Money is an instrument we use to pay for things.
Traditionally following items used as money: Clay, Cowry shells, Tortoise shells, Cattle, Slaves, Rice,
Wool, Salt, Porcelain, Stone, Gold, Iron, Brass, Silver, Paper & Leather etc.
Thus any items can be termed as money if they satisfy following function:
a) Served as medium of exchange.
b) Served as a common measure of value
c) Served as a store of values
Hence there are two types of MONEY


Pure Money Near Money
Cash & Demand deposits Bands, Govt. securities, Time
deposits, Equity share (financial asset)
So, Money is what money does.

1.1] FUNCTIONS OF MONEY:
In a static sense (Traditional Economics) In a dynamic sense (Modern Economics)
As a medium of exchange Direct economic trends
Common measure (Denominator) of value. Encouragement of divisions of labour.
Standard deferred (future debts) payment Smooth transformation of savings in to investment.
Store of value

1.2] MONEY STOCK IN INDIA:
As per RBI -1979 As per (Redefined money stock)
M1 (Narrow money):
Currency notes & Coins + Demand
deposits.
M1=
Currency + Demand deposits + Other deposits with RBI
M2 =
M1 + Post office saving deposits.
M2=
M1+ Time liabilities portion of saving deposits issued by banks +
Term deposits maturing within a year excluding FCNR (B) deposit.
M3 (Broad money) =
M1 + Time deposits with banks
M3=
M2+ Term deposits with banks with maturity over one year + Call/
term borrowing of the banking system
M4=
M1+ Total post office deposits
-------------------------------
Note: The difference between M1 & M3
is Time deposits with Bank
---------------------------------







Praveen Balduas Smart Notes ECONOMICS CACPT

Prepared by: Praveen Baldua www.pravinsir.com/www.freecsnotes.com Page 2


CHAPTER 8 UNIT 2
COMMERCIAL BANKING

2.0] INTRODUCTION:
Commercial Banks act as a bridge between the user of capital & those who save money.

2.2] FUNCTIONS OF A BANK:
1) Received deposits through:
a) Demand deposits i.e. saving A/c. & Current A/c. (Low or Nil interest for Current A/c.)
b) Time deposits i.e. fixed deposit (Highest int. rate)

2) Lending of money through:
Cash credit, Overdrafts, Loans & Advances or Discounts of bills etc.

3) Agency service i.e. collection of bills, Cheque, Dividends, Interest, Premium, Acts as a trustee etc.

4) General Service i.e.
a) Issue of LIC, Travelers cheques, drafts etc.
b) Safety of valuables vaults.
c) Under wring of shares, long term Loans etc.

2.3] COMMERCIAL BANKING IN INDIA:
At the time of independence India had only 645 banks & 4800 branches.
Nationalization of banks:
i. In 1969 14 banks were nationalised.
ii. In 1980 6 more banks were nationalised.
But at present there are 19 nationalised Banks (Because two banks were merged in 1993).
Objectives of Nationalisation:
i. Removal of control by few.
ii. Provision for credit to priority sector.
iii. Giving professional bent to management.
iv. Encouragement of new class of entrepreneurs
v. Provision of adequate training to bank staff.

2.4, 2.5 & 2.6]
2.4] Nationalisation of
commercial bank
2.5] Progress CB after
Nationalisation
2.6] Short comings of CB in
India.
1) Private ownership of commercial
bank & Concentration of economic
power:
All major banks were controlled
by one or more business houses to
use the resource for personal
benefits.
1) Expansion of branches.
In 2008 no of branches increased
to 76,885
Population per bank office has
reduced to around 15000 in 2008

The expansion of branch in
numerical terms is insufficient
because In rural area 41% of bank
branches serve more than 70%
population.
2) Urban bias:
Only 5000 banks serves to
In June 2008, 41% of total bank
branches established in rural areas.
Regional imbalances are there.
Praveen Balduas Smart Notes ECONOMICS CACPT

Prepared by: Praveen Baldua www.pravinsir.com/www.freecsnotes.com Page 3

around 5.6 lakhs village in India.
Five major cities (Ahemdabad,
Bombay, Calcutta, Delhi & Madras)
together had 1/7
th
share in the
numbers of bank office
& 50% share of bank deposits &
credits.
Deposit mobilesation in 2008 is
3197000 crores (almost 80% of NI)
Maharashtra account for 1/5
th
of
deposits.
Delhi, UP, WB, TN & Karnataka &
AP together account for 65% of
aggregate deposits.
3) Neglect of agricultural sector &
often priority sector:
Agriculture accounted for only
2.2% of total advance.
Others sectors such as exports,
SSI etc. were completely neglected.
Bank lending increased to 2362000
crores in June 2008
At present (March 08) 44% of the
commercial bank credit has been
accounted for Agriculture, SSI,
Small retail trade etc.
The gross non perform assets
(NPAS) has been increased up to
51000 crores in 200607
NPAs as a % of gross advance is
2.5% in 200607.
To reduce NPAs follows measure
are taken by RBI
1) Corporate debt restructuring.
2) Debt recovery through Lok
adalats, Civil courts & Debt
recovery tribunals.

4) Speculative activities:
Private banks provide loans to
Hoarders & Black marketers at a
high interest rate.







Absolute profit is increasing but
profitability ratio is decreasing due
to:
a) Law interest on Govt.
borrowings.
b) Low interest loans to priority
sector.
c) Increase in overheads.
d) Rapid branch expansions.
e) Lack of competition.
f) In creasy expenditure due to
overstaffing & expansion of
branches.
g) High incidence of NPAs



Bank finance the schemes which
promote enter partnership i.e. IRDP,
TRYSEM,JRY,NRY etc.
Quality of service rendered by
commercial banks has been
deteriorates overtime.












Praveen Balduas Smart Notes ECONOMICS CACPT

Prepared by: Praveen Baldua www.pravinsir.com/www.freecsnotes.com Page 4


CHAPTER 8 UNIT 3
THE RESERVE BANK OF INDIA

3.0, 3.2 & 3.3] MEANING, FUNCTIONS & ROLE OF CENTRAL BANK (RBI):
Central Bank (RBI) is the apex Bank, performs in the national economic interest.
In other words he is responsible for economic stability & assisting the growth of economy.

3.0] FUNCTIONS OF CENTRAL
BANK
3.2] ROLE OF RBI 3.3] FUNCTION OF RBI
1. Regulation of currency in
accordance with the requirement
of business & the general public.


1. Issue of Currency: RBI has sole authority
to issue currency other than 1 rupee coins
& notes & subsidiary coins.
2. Performance of Agency &
Banking service for the state
It acts as an advisor to the
Govt. in the economic &
Financial policies.
2. Banker to the Govt.:
RBI handles all banking operation on
behalf of state & central Govt. (i.e. many
payment)
It also sells Treasury bills on behalf or CG
& SG as well as given advance to CG & SG
for 90 Days.
Govt. act as an advisor for framing
policies.
3.
It grants collateral advances o
commercial Bank, Bill brokers &
dealers.
Custody of Cash reserve of the
Commercial Bank.
It acts as a Friend,
Philosopher & Guide to
Commercial Bank.
3. Bankers Bank:
It is called Bankers Bank because.
RBI has full power to control & supervise
commercial banks und RBI Act 1934 &
Banks regulation Act 1949.
RBI provides loans & advance in the form
of bill discounts etc.
All banks have to maintain certain
minimum cash reserve ratio with RBI
against demand & time deposits.
4. The custodian of Nations
reserves of International
Currency.



4. Custodian of Foreign exchange reserve :
RBI has to maintain the external value of
rupees.
Hence wherever foreign exchange is
inadequate it borrows from IMF.
5. Control of credit as per the
monetary policy adopted by the
state.
RBI has to keep Inflationary
trends under control & the
provide credits at cheap
rates to priority sector.
5. Controller of credits:
Controlling credit operations is a Principal
function of a central bank by using
Qualitative & Quantitative methods of
credit control.




6. Promotional Functions:
RBI also performs a variety of
developmental functions for this NABARD,
SIDBI & EXIM BANK has developed.


Praveen Balduas Smart Notes ECONOMICS CACPT

Prepared by: Praveen Baldua www.pravinsir.com/www.freecsnotes.com Page 5

3.1] CENTRAL BANK VS. COMMERCIAL BANK :
CENTRAL BANK COMMERCIAL BANK
1) Its objectives are not to make profit. Its is a profit making Institution.
2) Central bank deals with governments, Central &
State banks & others financial institute.
Commercial bank deals with only Public.
3) Central bank ensures other banks conduct their
business with Safety, Security & In pursuance with
economic & Social development.
Commercial bank ensures mobilize saving &
channelise them in to proper use.
4) Its main source of Income is
a) Reserve against note issue & interest.
b) Interest on advance& loans grant to state govt. &
other financial institution & commercial banks.
Its main source of income is :
Interst on Loans & Advances grants to public.
5) It does not allow interest on deposits. It allows interest on deposit.


3.4] INDIAN MONETARY POLICY:
A main objective of monetary policy in India is:
1) To maintain price stability
2) To ensure adequate credit for economic growth
3) To encourage credit flow in to desire, neglected & priority sectors.
4) To Strengthing the banking system.

There are two types of monetary policy i.e.
1) Quantitative or General Measures are used to influence Total volume of credit in the economy.
2) Qualitative or selective measures are used to influence Specific or particular use of credit (not total
volume)

I] Quantitative measures or General measures
METHOD EXPLANATION
BANK RATE POLICY It is traditional weapon of credit control.
Bank rate is a rate at which central bank discounts bill of commercial banks.
During Inflation Bank rate
During Deflation Bank rate
At present Bank rate is 6%
OPEN MARKET
OPERATIONS (OMO)
OMO means direct purchase & Sales of securities & bill in the market by central
bank.
During Inflation Sell the securities in the market.
During Deflation Buy securities from the market
VARIABLE RESERVE
REQUIREMENT
There are two types of reserve i.e.
1) Cash reserve Ratio: It is that portion of total deposit which commercial bank
keeps with (Central Bank)
2) Statutory liquidity Ratio: It is that portion of total deposits which commercial
bank keep with himself in the form of cash gold or approved Govt securities.
During Inflation Reserve Ratios
During Deflation Reserve Ratio
At present CRR is 5% & SLR is 24%.
REPO RATE & REVERSE
RATE
Repo rate is a rate at which our banks borrow rupees from RBI against approved
securities to fulfill short term gap.
Praveen Balduas Smart Notes ECONOMICS CACPT

Prepared by: Praveen Baldua www.pravinsir.com/www.freecsnotes.com Page 6

At present Repo rate is 4.75%
Reverse repo rate is a rate at which RBI borrow money from banks.
At present reverse repo rate is 3.25%

SITUATION REPO RATE REVERSE REPO
RATE
DURING INFLATION

DURING DEFLATION

II] Qualitative or Selective measures.
METHOD EXPLANATION
Securing loan regulation by
fixation of margin
requirements.
During Inflation margin requirement is
During Deflation margin requirement is
This method is also useful to check inflation in certain sensitive spots.
Consumer credit regulation Consumer credit consists of down payments & No. of installments.
Situation Down payment No of Installment.
During Inflation



During Deflation



Issue of Directives Directives are oral or written statements appeals or warnings to crub
individual credit by central bank to commercial banks.
Rationing of credit. This method is used to regulate the purpose for which credit is granted.
Moral suasion It is a psychological means of controlling credit.
It is purely informal & milder method
Under this method central bank persuade or request to commercial bank to co
operate with general monetary policy (i.e. not to finance speculative or non
essential activities)
Direct Action. Some time central Bank takes action against commercial bank like.
a) Refuse to rediscount their papers.
b) Refuse to give excess credit
c) Or charge panel rate of Interest over & above bank rate.








*****************BEST OF LUCK*****************