Currency Banking and Exchange Revision eNotes

 

REVISION eNOTES

Currency Banking and Exchange 

BCOM SEM I

Definition of Money

Money, in simple terms, is a medium of exchange. It is instrumental in the exchange of goods and/or services.

Further, money is the most liquid assets among all our assets. It also has general acceptability as a means of payment along with its liquid nature.

Usually, the Central Bank or Government of a country creates and issues money. Also called cash money, this is a legal tender and hence there is a legal compulsion on citizens to accept it.

According to Walker “Money is that what money does”.

According to Kent “Anything which is widely used as a medium of exchange and standard of value is money”.

Functions of Money

There are many static and dynamic functions of money as follows:

I.Static Functions of Money

These functions are:

1.A medium of Exchange – In an exchange economy, money plays an

intermediary role. It makes the exchange system smooth and convenient.

2.A measure of Value – The value of a product or service is determined on the basis of the money needed for its possession. This helps in making the exchange a mutually profitable activity.

3.The Standard of Deferred Payments – Money plays an important role in lending and borrowing. Money is taken as a loan and repaid after a time-gap.

4.Store of Value – You can store the purchasing power of money and keep a part of it for future use – monetary savings. You can use your current income for current consumption as well as future consumption through savings.

II.Dynamic Functions of Money:

These functions are:

1.Money can activate idle resources and put them into productive

channels.

2.Therefore, it helps in increasing output, employment, and also income levels.

3.Further, it helps in converting savings into investments.

4.The creation of new money governments of modern economies can spend more than what they earn.

Importance of Money

The importance of money can be easily realized from the fact that almost all the economic, social, and other activities are carried and completed through the use of money.However, the main importance of money is discussed are as under:-

1. Production

Money has made mass production possible. The large scale production is necessary to meet the growing demand of the consumers. Mass production is possible with a division of labor that depends upon money.

2. Consumption

Money helps the consumer to spend his income in such a way so that he can get maximum satisfaction. Money has generalized purchasing power. The consumer can buy the necessary goods at reasonable rates to get maximum utility.

3.Distribution

At present the production process is not simple. The production is made through the various factors of production like land, labor, capital and organization. The raw material is purchased to make new things. But each factor does not contribute equally to the product. Therefore, the distribution of products equally among the factors of production is unjust.

4.Exchange

Another thing that can elaborate on the importance of money in better ways is the exchange of values through money. The exchange of goods and services is done through money. When goods are exchanged for goods even then money is used as a measure of value.

5.Government

Money is important to the government. The taxes, fee and penalty are collected in money. The government can take loans in the shape of money. The development of the economy requires the establishment of schools, hospitals, bridges, roads, dams, energy resources, communication, etc which is only possible through money.

Various Forms of Money

We can classify the total money supply of an economy into two broad groups – Cash Money and Credit Money, including all other financial assets. The degree of money-ness of different assets is different.

The Components of Money Supply

The components of the money supply are as follows:

1.Paper Money and Coins – The Central Bank or Government issues these as Currency. Further, they have a 100% acceptance as a means of payment. The acceptance is based on a ‘promise to pay the bearer’ gold and/or foreign exchange in return.

2.Demand Deposit – A bank has a legal obligation to pay money on demand. The money-ness is highest in currency and demand deposits.

3.Near Money or Money Substitute – A commonly used Near Money is a bank cheque. many people accept it as a means of payment. However, there is no legal compulsion behind their acceptance.

4.Term deposit – This is less liquid than a demand deposit as the individual cannot use it before a fixed period of time.

5.Other Financial Assets – Many non-banking financial intermediaries issue these assets.

Electronic Money

Electronic money refers to the currency electronically stored on electronic systems and digital databases used to make it easier to transact electronically. It is popularly referred to by many names, including digital cash, digital currency, e-money, and so on.

E-money is a monetary value that is stored and transferred electronically through a variety of means – a mobile phone, tablet, contactless card (or smart cards), computer hard drive or servers. Electronic money need not necessarily involve bank accounts in transaction but acts as a prepaid bearer instrument. They are often used to execute small value transactions.

Features of Electronic Money:

Just like physical paper currency, electronic money also includes the following four features:

1.Store of value: Just like physical currency, electronic money is also a store of value, the only difference being, that with electronic money, the value is stored electronically unless and until withdrawn physically.

2. Medium of exchange: Electronic money is a medium of exchange, i.e., it is used

to pay for the purchase of a good or when acquiring a service.

3. Unit of account: Just like paper currency, electronic money provides a common measure of the value of the goods and/or services being transacted.

4. Standard of deferred payment: Electronic money is used as a means of deferred payment, i.e., used for the tools of providing credit for repayment at a future date.

Quantity Theory of Money

In the words of Fisher, “Other things remaining unchanged, as the quantity of money in circulation increases, the price level also increases in direct proportion and the value of money decreases and vice versa.” If the quantity of money is doubled, the price level will also double and the value of money will be one half. On the other hand, if the quantity of money is reduced by one half, the price level will also be reduced by one half and the value of money will be twice.

Fisher has explained his theory in terms of his equation of exchange:

PT=MV+ M’ V’

Where P = price level, or 1 IP = the value of money; M = the total quantity of legal tender money;

V = the velocity of circulation of M;

M’ – the total quantity of credit money;

V’ = the velocity of circulation of M;

T = the total amount of goods and services exchanged for money or transactions performed by money.

Assumptions of the Theory:

Fisher’s theory is based on the following assumptions:

1.P is passive factor in the equation of exchange which is affected by the other factors.

2.The proportion of M’ to M remains constant.

3.V and V are assumed to be constant and are independent of changes in M and M’.

4.T also remains constant and is independent of other factors such as M, M, V and V.

5.It is assumed that the demand for money is proportional to the value of transactions.

Criticism of the Theory:

Equation of exchange does not explain the cyclical behaviour of Prices and Production.

Unrealistic assumption such as V, T etc., are constant.

Price level depends upon many other factors like Consumption habits, Central Bank Policy etc.,

Equation treed Money as Medium of Exchange only and required for Transaction purpose only.

MONETARY STANDARD

Monetary standards are the set of rules and institutions that control the supply of money in a country’s economy.The idea is to have rules and regulations in place to constrain the production and supply of money. Otherwise, with excess money in the market, the whole balance of the economy will be destroyed.

One definition of monetary standards is “the principle way of regulating the quantity of money in the market as well as its exchange value”. So monetary standards also have an indirect effect on the prices in the economy.And by monitoring the supply of money, it also has an effect on the rate of growth in the economy and other factors that affect such economic growth.

TYPES OF MONETARY STANDARDS

Overall there can be two main kinds of monetary standards – metallic standards or paper standard. Metallic standards themselves can be of two types – monometallism and bimetallism. Let us take a more detailed look at the types of monetary standards.

1] Monometallism: Also known as Single Standard, here only one metal is adopted as the standard currency/money.The monetary system is made up of and relies entirely on one metal, like say the gold standard or the silver standard. So coins are made up of one metal only.

This means these coins are the legal tender for all day to day transactions.There is unlimited manufacture of coins, i.e. free coinage.

2]Bimetallism: As the name suggests, in the double standard or bimetallism system, two metals are adopted as standard money.There is a fixed legal ratio between the value of the two metals to facilitate exchange. Usually, the two metals are gold and silver. So two types of standard coins are minted (gold and silver).

So under bimetallism, two types of metal coins are in circulation simultaneously in the economy. Both have free coinage. And using the legal ratio of exchange both are convertible into each other. One main advantage of this system is that the economy has a full-bodied currency. Silver can be used for the smaller transactions and gold for the bigger ones.

3]Paper Currency Standard

Under this monetary standard, the currency prevailing in the economy will be paper currency. In most cases, this currency system is managed by the Central Bank of the country, RBI in the case of India, and so we can also call it Managed Currency Standard.The currency consists of bank notes and government notes.

 

Most countries of the world follow this monetary standard.This is because it is amanaged and controlled system. So an authority will monitor the quantity of money supply keeping in mind the stability in prices and income in the economy. It is also very economical in terms of production (currency notes). And they are far more convenient than metallic standards.

PRINCIPLE OF NOTE ISSUES

The principles of note issue are classified into two classes. One opinion says that complete conversion of notes into gold bars is known as the “Currency Principle”.The second advocates the elasticity in the supply of money according to the needs of trade and commerce, known as “Banking Principle.”

1.Currency Principle: ccording to these principles of note issue, notes are issued against gold reserve.The paper money is an reasonable substitute for metallic money.The paper money should have backing hundred percent of gold reserve. If there is lack of gold reserve against paper money. People will lose confidence in such notes. Hence, notes issued should be limited to the limit and quantity of notes issued will automatically expand or contract according to the inflow and outflow of gold into and out of the country concerned.

 

The advantages claimed for this principal is that there is full care and protection to the paper currency. Moreover, excess issuance of currency in this principle is no danger. In this case, issue of currency depends on the availability of gold.

2.Banking Principle:

Under banking principles of note issue, there is no requirement for backing of paper money by law. Notes issued should entirely on the discretion and necessity of the bank and trade. Bank will sustain sufficient reserve to honor the notes in their own interest. Under this principal, the surplus money should be routinely offered for cash payment, if there is an excess of notes issued and thus the appropriate ratio will be sustain between gold reserve and supply of money.This system is faced with the danger of over issue and as a result public confidence is lacking in this system.

After reading the above mentioned principles of note issue, now we can easily arrive at a conclusion that both these systems of note issue are defective. One scarifies elasticity and other security.These days, a certain percentage of notes issued by the central bank backed by gold or silver.

METHODS OF NOTE ISSUES

1.Fixed Fiduciary System:

Under this method of note issue, central bank of the country is allowed to issue currency notes of a specified amount without presenting gold and silver to cover it. Once this limit is reached, additional amount of notes can be issued by hundred percent backed by gold.The advantages claimed for this method is that it gives elasticity in the money supply. It also grant maximum care due to the excess issuance of notes of the “Fiduciary Limit” except they are sheltered by hundred percent of gold.The possibility of inflation is effectively checked.

However, this system is objected on the ground that judiciary limit is open to change by amendment in the Act and is raised will lose the confidence of the people.

 

2.Maximum Fiduciary System

According to this method of note issue, the fiduciary system’s limit is fixed above the normal requirements of the country. Beyond the maximum no note is issued without legal sanction.This system is defective in the sense that, if the limit is too low, the currency system becomes inelastic and if the limit is too high, there is danger of over issue of notes.

3.Proportional Reserve System

Under this method of note issue, the central bank is mandatory by law to maintain a permanent percentage from 25% to 40% adjacent to issuance of notes. It is often called percentage system.The remainder of the notes is to be covered by trade bills and government securities.This system is easily operated and it gives needed elasticity to the currency note system. But the system is uneconomic as huge amount of gold is kept idle as reserve. Moreover, the value of money is not stable, but this system is elastic up to a certain limit.

4.Minimum Reserve System

Under this method of note issue, the reserve limit is permanently fixed and the volume of the notes has no connection with the amount of the reserve.To meet the ever- increasing demand for currency, government can issue notes up to any amount against the reserve but it is faced with the danger of the inflation.

INDIAN MONEY MARKET

•It is a financial market where short-term financial assets having liquidity of one year or less are traded on stock exchanges.The securities or trading bills are highly liquid. Also, these facilitate the participant’s short-term borrowing needs through trading bills.The participants in this financial market are usually banks, large institutional investors, and individual investors.

•There are a variety of instruments traded in the money market in both the stock exchanges, NSE and BSE.These include treasury bills, certificates of deposit, commercial paper, repurchase agreements, etc. Since the securities being traded are highly liquid in nature, the money market is considered as a safe place for investment.

 

The Reserve Bank controls the interest rate of various instruments in the money market.The degree of risk is smaller in the money market.This is because most of the instruments have a maturity of one year or less.

Money Market Instruments

1. Call/notice money

It is a segment of the market where scheduled commercial banks lend or borrow on short notice (say a period of 14 days). In order to manage day-to-day cash flows.

2.Treasury bills

T-bills are one of the safest money market instruments.The Central Government issues this financial instrument and it carries an attractive interest rate. Also, these come with different maturity periods of 3, 6 months, and 1 year.

3.Inter-Bank Term Market

This market was initially only for commercial and co-operative banks but are now available to various financial institutions as well.The interest rates are market-driven. Also, the market is predominantly a 90-day market.

 

4.Certificate of Deposit

Certificates of Deposit, CD are term-deposits accepted by the commercial banks at market rates.

Also, all scheduled banks (except RRB’s and Cooperative banks) are allowed to issue CP. It can be issued for a period of 3 months to 1 year. For a single investor, this financial instrument can be issued up to 5 lakhs.

Unit: II

MEANING OF CREDIT

•CREDIT refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.

Importance :

1.Availability of credit is very important for development.

2.In India, majority of people need credit for various purposes.

3.Farmers in order to increase their production need credit to buy HYV of seeds fertilizers, pesticides, irrigation facilities.

4.People in order to set up business, small scale industry, cottage industry need loans to buy raw material machines etc.

5.Government also needs credit for its development projects.

 

NEED FOR CREDIT CREATION

1.Commercial banks are called the factories of credit.

2.They advance much more than what the collect from people in the form of deposits.

3.Through the process of credit creation, commercial banks provide finance to all sectors of the economy thus making them more developed than before.

The basis of credit money is the bank deposits.

 The bank deposits are of two kinds viz.,

•Primary deposits,

•Derivative deposits

Primary deposits

•Primary deposits arise or formed when cash or cheque is deposited by customers.

•When a person deposits money or cheque, the bank will credit his account.

•The customer is free to withdraw the amount whenever he wants by cheques.

•These deposits are called “primary deposits” or “cash deposits.”

•It is out of these primary deposits that the bank makes loans and advances to its customers.

•The initiative is taken by the customers themselves. In this case, the role of the bank is passive.

•So these deposits are also called “passive deposits.” • It is out of these primary deposits that the bank makes loans and advances to its customers.

•The initiative is taken by the customers themselves. In this case, the role of the bank is passive.

•So these deposits are also called “passive deposits.”

Derivative Deposits

•Bank deposits also arise when a loan is granted or when a bank discounts a bill or purchase government securities.

•Deposits which arise on account of granting loan or purchase of assets by a bank are called “derivative deposits.”

•Since the bank play an active role in the creation of such deposits, they are also known as “active deposits.

Credit Creation

•When the bank buys government securities, it does not pay the purchase price at once in cash.

•It simply credits the account of the government with the purchase price.

•The government is free to withdraw the amount whenever it wants by cheque

•The power of commercial banks to expand deposits through loans, advances and investments is known as “credit creation.”

The banking system as a whole can create credit which is several times more than the original increase in the deposits of a bank. This process is called the multiple-expansion or multiple-creation of credit.

•Similarly, if there is withdrawal from any one bank, it leads to the process of multiple contraction of credit.

•The process of multiple credit-expansion can be illustrated by assuming – The existence of a number of banks, A, B, C etc., each with different sets of depositors. – Every bank has to keep 10% of cash reserves, according to law, and, – A new deposit of Rs. 1,000 has been made with bank A to start with.

CREDIT CONTROL BY RBI

•The most important function of the central bank ( RBI ) is to control credit created by commercial banks. Money & credit represent a powerful force to good or evil in the economy. It is the duty of the central bank to ensure that money & credit is properly managed so that inflationary & deflationary pressures can be control by the economy.

•Commercial banks create credit in the process of lending. They have the power of credit creation. The important of credit in the settlement of business transactions has increased. The central bank also has the responsibilities to control the direction of credit flow in line with the overall economic priorities.

IMPORTANCE OF CREDIT CONTROL

1) To obtain stability in the internal price level.

2) To attain stability in exchange rate.

3) To stabilize money market of a country.

4) To eliminate business cycles –inflation & depression –by controlling supply of credit.

5) To maximize income, employment & output in a country.

6) To meet the financial requirements of an economy not only during normal times but also during emergency or war 7) To help the economic growth of a country within specified period of time.

Methods and instruments of credit control

•There are two methods and instruments of credit control :

I)Quantitative Or General Methods: Quantitative methods are those which aim at controlling the total volume of credit. They are used to regulate the quantity of credit created by banks. By using these methods the central banks controls the amount of credit.

1.Bank Rate.

2.Open Market Operations.

3.Variable Cash Reserve Ratio.

4.Statutory Liquidity Ratio.

 

1.bank rate: Bank rate is the rate at which central bank ( RBI in India ) grant loans to the commercial banks against the Govt. security & other approved first class securities.

•Reserve Bank adopts Cheap & Dear Monetary Policy according to economic condition of the country 

a.Cheap Monetary Policy :- RBI decreases bank rate to increase the quantity of credit in the country, this is called cheap monetary policy. Decrease in bank rate » decrease cost of credit i.e. Decrease in interest rate … As a result of this quantity of credit increases.

b.Dear Monetary Policy :- RBI increases bank rate to decrease the quantity of credit in the country, this is called dear monetary policy. increase in bank rate » increase cost of credit i.e. increase in interest rate … this will result in decrease in quantity of credit. ( Current bank rate is 4.25% )

2.Open market operations : Open Market Operations refers to the deliberate & direct buying & selling of securities & bills in the money market by the central bank.

Purchase & sells of securities may lead to expansion & contraction of money supply in the money market. It influences the cash reserves with the commercial banks & hence these operation control their credit creation power.

Inflationary pressure:- the central bank would sell the govt. securities to the commercial banks. the banks would transfer a part of their cash reserves to the central bank towards the payments of these securities. Consequently the cash reserves with the commercial banks will be reduced. It would lead to a contraction in the credit creation power of the commercial banks.

Deflationary pressure :- in this situation the central bank will purchase securities from the commercial banks. In the process the cash reserves with the commercial bank will increase & they would be enable to create more credit This weapon is used to fulfill the seasonal credit requirements of commercial banks.

3.Cash Reserve Ratio :The RBI controls credit through change in Cash Reserve Ratio (CRR ) of commercial banks.

•Every commercial bank is required by law to maintain certain percentage of its deposit with the central bank which is called cash reserve ratio.

•The central bank has a power to change the percentage of cash reserve to be kept with it.

•If the ratio increases the credit creation capacity of commercial banks decreases. On the other hand if the ratio decreases the credit creation capacity if commercial banks increases.

•This ratio can be varied from 3 % to 15% as directed by the RBI.

•By changing the reserve requirement, the central bank is able to effect the amount of cash with the commercial banks & force them to curtail or expand credit. 

4.Statutory liquidity ratio : Every scheduled bank is required by law to maintain a minimum of 20% as cash , gold or unencumbered securities of its total demand & time liabilities, which is called Statutory liquidity ratio ( SLR )

•The RBI is empowered to change this ratio.

•It is also influence the credit creation capacity of the banks

•The effect of both CRR & SLR on credit expansion is similar.

•As on Oct 21, 1997, it was fixed to 25% of the total deposit of the commercial banks.

•Penalties are levied by RBI for not maintaining these ratio’s from scheduled banks. ( Current SLR is 18% )

 

II)Qualitative Or Selective Methods: Qualitative methods are used to effect the use, distribution & direction of credit. • It is used to encourage such economic authorities as desirable & to discourage those which are injurious for the economy.

•RBI from time to time had adopted the following qualitative methods of credit control:-

1.Rationing Of Credit .

2.Margin Requirements.

3.Regulation Of Consumer Credit.

4.Control Through Directives.

5.Publicity.

6.Moral Suasion.

7.Direct Action.

1.Rationing Of Credit • In this method RBI seeks to limit the maximum or ceiling of loan advances and also in certain cases, fixes ceiling for specific categories of loans & advances.

It aims to control & regulate the purposes for which the credit is granted by commercial banks.

a)Variable portfolio ceiling:- According to this the central bank fixes a ceiling on the amount of loans & advances for each bank & the bank cannot advance loans beyond this limit.

b)Variable capital asset ratio :- This is the ratio which the central bank fixes in relation to the capital of a bank to its total assets.

2.Margin Requirements • Commercial banks do not lend up to the full amount of the value of security. the loan amount is lass than the securities value. It keeps a ‘margin’ as a cushion against fall in the value of the security. • ‘margin’ refers to the difference between the current market value and the loan value of a security. It is a portion of the value of the security charged to a bank, which the borrower is expected to pay out of his own resources. • a rise in the margin requirement restricts the amount of loan that a bank can grant against a security , while a lower margin increases it. • In this way, the amount of fixing margin requirements has a direct impact on the amount of credit for speculation purposes. • during depression, the margin can be reduced so that there is increase in the level of economic activity through an increase in demand for bank credit. conversely, during inflation, margin requirements can be raised by the monetary authorities so as to contain the boom in the stock market.

 

3.Publicity: The RBI may also follow the policy of publicity in order to make known to the public its view about the credit expansion or contraction. • RBI regularly publish statements of assets & liabilities of commercial banks for information to the public. They also publish reports of general money market & banking condition. • This is a way of exerting moral pressure on the commercial banks & also making the public aware of the policies being adopted by banks & the central bank in the light of prevailing economic conditions in the country.

4.Moral Suasion: It refers to the advise or request made by the central bank to the commercial banks to follow the monetary policy and carry out their lending activities & other operations in such a way as to achieve the objective of the central banks policy. • It can be in the form of advise to commercial banks regarding their investments or care to be taken while granting loans & advances against such commodities the prices of which may rise due to speculative activity. • Being an apex institution & lender of the last resort , the RBI can used its more pressure & persuade the commercial bank to follow its policy.

5.Direct Action: Direct action refers to the direction & controls which the central bank may enforce on all banks or a particular bank concerning their lending & investments. In such case:- 1) RBI may refuse to sanction further accommodation to a bank. 2) The RBI may reject altogether any application for grant of discounting facilities to the bank. 3) It may change penal rate of interest on loans taken by a bank beyond the prescribed limit.

Unit: III

BANKING

The banking industry handles finances in a country including cash and credit. Banks are the institutional bodies that accept deposits and grant credit to the entities and play a major role in maintaining the economic stature of a country. Given their importance in the economy, banks are kept under strict regulation in most of the countries. In India, the Reserve Bank of India (RBI) is the apex banking institution that regulates the monetary policy in the country.

 

TYPES OF BANK

Banks are classified into classified into four categories –

1.Commercial Banks

2.Small Finance Banks

3.Payments Banks

4.Co-operative Banks

Commercial Banks

Commercial Banks can be further classified into public sector banks, private sector banks, foreign banks and Regional Rural Banks (RRB). On the other hand, cooperative banks are classified into urban and rural. Apart from these, a fairly new addition to the structure is payments bank.

Commercial Banks are regulated under the Banking Regulation Act, 1949 and their business model is designed to make profit. Their primary function is to accept deposits and grant loans to the general public, corporate and government. Commercial banks can be divided into-

1. PUBLIC SECTOR BANK.

2. PRIVATE SECTOR BANK.

3. FOREIGN BANK.

4. REGIONAL RURAL BANK.

PUBLIC SECTOR BANK

These are the nationalized banks and account for more than 75 per cent of the total banking business in the country. Majority of stakes in these banks are held by the government. In terms of volume, SBI is the largest public sector bank in India and after its merger with its 5 associate banks (as on 1st April 2017) it has got a position among the top 50 banks of the world.

PRIVATE SECTOR BANK

These include banks in which major stake or equity is held by private shareholders. All the banking rules and regulations laid down by the RBI will be applicable on private sector banks as well.

FOREIGN BANK

A foreign bank is one that has its headquarters in a foreign country but operates in India as a private entity. These banks are under the obligation to follow the regulations of its home country as well as the country in which they are operating.

REGIONAL RURAL BANK

These are also scheduled commercial banks but they are established with the main objective of providing credit to weaker sections of the society like agricultural labourers, marginal farmers and small enterprises. They usually operate at regional levels in different states of India and may have branches in selected urban areas as well. Other important functions carried out by RRBs include-

1.Providing banking and financial services to rural and semi-urban areas

2.Government operations like disbursement of wages of MGNREGA workers, distribution of pensions, etc.

3.Para-Banking facilities like debit cards, credit cards and locker facilities.

SMALL FINANCE BANK

This is a niche banking segment in the country and is aimed to provide financial inclusion to sections of the society that are not served by other banks. The main customers of small finance banks include micro industries, small and marginal farmers, unorganized sector entities and small business units. These are licensed under Section 22 of the Banking Regulation Act, 1949 and are governed by the provisions of RBI Act, 1934 and FEMA.

PAYMENT BANK

This is a relatively new model of bank in the Indian Banking industry. It was conceptualized by the RBI and is allowed to accept a restricted deposit. The amount is currently limited to Rs. 1 Lakh per customer. They also offer services like ATM cards, debit cards, net-banking and mobile-banking.

CO-OPERATIVE BANK

Co-operative banks are registered under the Cooperative Societies Act, 1912 and they are run by an elected managing committee. These work on no-profit no-loss basis and mainly serve entrepreneurs, small businesses, industries and self-employment in urban areas. In rural areas, they mainly finance agriculture-based activities like farming, livestock and hatcheries.

SCHEDULED BANK

Scheduled banks are covered under the 2nd Schedule of the Reserve Bank of India Act, 1934. To qualify as a scheduled bank, the bank should conform to the following conditions:

A bank that has a paid-up capital of Rs. 5 Lakh and above qualifies for the schedule bank category

A bank requires to satisfy the central bank that its affairs are not carried out in a way that causes harm to the interest of the depositors

A bank should be a corporation rather than a sole-proprietorship or partnership firm

NON- SCHEDULED BANK

Non-scheduled banks refer to the local area banks which are not listed in the Second Schedule of Reserve Bank of India. Non-Scheduled Banks are also required to maintain the cash reserve requirement, not with the RBI, but with them

CENTRAL BANK

A central bank is an apex institution, which operate, control, directs and regulates the monetary and banking structure of a country. A central bank is so called because it occupies a central or highest position in monetary and banking structure of the country. In India RESERVE BANK OF INDIA is the central bank of the country.

Primary function of central banking is a banking system in which a central bank has either a complete or a residuary monopoly in note issue.

RBI commenced its operations on 1 April 1935 during the British Rule in accordance with the provisions of the Reserve Bank of India Act, 1934 . Reserve Bank of India was set up based on the recommendation of Hilton Young commission of 1926. The RBI was nationalised on 1 January 1949.

The RBI is entrusted with the 21-member Central Board of Directors: the Governor, 4 Deputy Governors, 2 Finance Ministry representatives, 10 government- nominated directors to represent important elements of India's economy, and 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi.

First governor of RBI was Osborne smith. First Indian governor was CD Deshmukh. Present RBI governor is Shaktikanta Das. The financial year of RBI is from 1st July to 30 June. Original Headquarters of RBI in KOLKATA but in 1937 it was sifted to, Mumbai

FUNCTION OF CENTRAL BANK

There are two types of functions of central bank-

1.Monetary function

2.Non-monetary function

MONETARY FUNCTION

1.Bank of issue or currency function ¾ RBI in our country has been given sole right of issue of currency notes except one rupees note. This function gets such importance that central bank has come to be known as bank of issue. ¾ Central bank keeps three main consideration regarding issue of notes- (1) Uniformity (2) Elasticity (3) Safety ¾ RBI tries to keep money growth within a target range and keeps inflationary pressure at a low level.

 

2.It helps the Government with short-term loans and advance in times of difficulty . GOI borrows money from RBI to finance its budget deficit. ¾ As government agent, the central bank conduct sell and purchase of government securities also manage national debt and foreign debt.

3.All commercial bank keep part of their cash balance as deposit with central bank. The central bank act as the custodian of these reserve. It is because of this function that a CB is called a bank of bankers.

4.The central bank lends to the commercial bank in times of emergencies. The central bank assume responsibility of meeting directly or indirectly all the reasonable demand for funds by commercial bank in time of difficulty or crisis.

5.Central bank can control inflationary and deflationary situation in the economics through various control measures. Credit control measures are also as instrument of monetary policy.

There are two methods of credit control measure- 

(1) Quantitative credit control 

(2) Qualitative credit control

Quantitative control measure- are the measures which are suppose to control the total volume of bank credit.

The main quantitative measures are-

(1) bank rate policy

(2) open market operation

(3) variable reserve requirements

Qualitative credit control measure, which control certain types of credit and allocate credit between alternative uses are called qualitative measures. 

The major qualitative control are- (1) change in marginal requirement (2) moral suasion (3) control of consumer’s credit (4) selective credit control

NON- MONETARY FUNCTION

1.Supervision of bank- The central bank supervises and monitors the working of commercial bank. The RBI is given power to supervise and monitor the working of commercial bank under the banking regulation act 1949.

2.Promotional and development function- It performs promotion and development function also such as RBI set up NABARD to promote agriculture and rural development. It has also set up EXIM bank of India to promote foreign trade.

3.data collection and publication- The central bank collect data on various economic matters such as foreign trade, foreign investment in India, inflation and so on.

4.Clearance- Central bank also gives clearance to various proposal or projects involving financial consideration. for instance it clears proposal from Indian firms to invest in foreign country. We hope your experience was awesome and we can’t wait to see you again soon

E-BANKING

•Electronic banking has many names like e banking, virtual banking, online banking, or internet banking. It is simply the use of electronic and telecommunications network for delivering various banking products and services. Through e-banking, a customer can access his account and conduct many transactions using his computer or mobile phone.

1.Lesser transaction costs – electronic transactions are the cheapest modes of transaction

2.A reduced margin for human error – since the information is relayed electronically, there is no room for human error

3.Lesser paperwork – digital records reduce paperwork and make the process easier to handle. Also, it is environment-friendly.

4.Reduced fixed costs – A lesser need for branches which translates into a lower fixed cost.

5.More loyal customers – since e-banking services are customer-friendly, banks experience higher loyalty from its customers.

6.Convenience – a customer can access his account and transact from anywhere 24x7x365.

7.Lower cost per transaction – since the customer does not have to visit the branch for every transaction, it saves him both time and money.

POSTAL BANKING

•A modern payment infrastructure enables consumers, businesses and organizations to exchange services and products in an efficient way.

A concept that is affordable for people and - at the same time - profitable for a payment service provider.

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Concept of Foreign Exchange

Foreign exchange is the conversion of one currency into another at a specific rate known as the foreign exchange rate. The conversion rates for almost all currencies are constantly floating as they are driven by the market forces of supply and demand.

The most traded currencies in the world are the United States dollar, Euro, Japanese yen, British pound, and Australian dollar. The US dollar remains the key currency, accounting for more than 87% of total daily value traded.

Exchange Rate

Foreign exchange rate is the price at which one currency can be converted into another. It represents the rate at which a firm may exchange one currency for another. Thus, the exchange rate is simply the amount of a nation's currency that can be bought at a given time for a specified amount of the ncy of another country.

The actual amount received in conversion or the effective exchange rate, usually differs from the stated rate because it takes into account all taxes, commissions and other costs that the public must pay to complete the transaction and actually receive the foreign funds.

Types of Foreign Exchange Rate

1.Fixed and Floating Rates: When Government of a country fixes the rate of exchange for its own currency, it is termed as ed Exchange Rate'. This is also known as official rate of exchange. Fixed exchange rates are fixed by the respective Governments from time to time for the betterment of their economy.

In contrast exchange rates move, as in any other market place, depending on the demand and supply pressure and are further influenced by the market forces and economic conditions of the respective countries. Floating exchange rate may be free floating or a managed floating.

A currency is freely floating if there does not exist a system of fixed exchange rates and if the Central Bank of the country in question does not attempt to influence the value of the currency. However, in reality this kind of situation does not exist.

In most of the countries Governments attempt to influence movements of exchange rate either through direct intervention in the exchange market or through a mix of fiscal and monetary policies. Under such circumstances, floating is called as 'managed' or 'dirty float.

Factors Causing Fluctuations in Exchange Rate

1.Inflation Rates: Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another's will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher interest rates

2.Interest Rates: Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates, and inflation are all correlated. Increases in interest rates cause a country's currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates

 3.Balance of Payments: A country's current account reflects balance of trade and earnings on foreign investment. It consists of total number of transactions including its exports, imports, debt, etc. A deficit in current account due to spending more of its currency on importing products than it is earning through sale of exports causes depreciation. Balance of payments fluctuates exchange rate  of its domestic currency.

4.Government Debt: Government debt is public debt or national debt owned by the central government. A country with government debt is less likely to acquire foreign capital, leading to inflation. Foreign investors will sell their bonds in the open market if the market predicts government debt within a certain country. As a result, a decrease in the value of its exchange rate will follow.

5. Terms of Trade: Related to current accounts and balance of payments, the terms of trade is the ratio of export prices to import prices. A country's terms of trade improves if its exports prices rise at a greater rate than its imports prices. This results in higher revenue, which causes a higher demand for the country's currency and an increase in its currency lue. Th results in an appreciation of exchange rate. 6. Political Stability & Performance: A country's political state and economic performance can affect its currency strength. A country with less risk for political turmoil is more attractive to foreign investors, as a result, drawing investment away from other countries with more political and economic stability. Increase in foreign capital, in turn, leads to an appreciation in the value of its domestic currency. A country with sound financial and trade policy does not give any room for uncertainty in value of its currency. But, a country prone to political confusions may see a depreciation in exchange rates.

Recession: When a country experiences a recession, its interest rates are likely to fall, decreasing its chances to acquire foreign capital. As a result, its currency weakens in comparison to that of other countries, therefore lowering the exchange rate.

8. Speculation: If a country's currency value is expected to rise, investors will demand more of that currency in order to make a profit in the near future. As a result, the value of the currency will rise due to the increase in demand. With this increase in currency value comes a rise in the exchange rate as well.

Conclusion:

All of these factors determine the foreign exchange rate fluctuations. If you send or receive money frequently, being up-to-date on these factors will help you better evaluate the optimal time for international money transfer. To avoid any potential falls in currency exchange rates, opt for a locked-in exchange rate service, which will guarantee that your currency is exchanged at the same rate despite any factors that influence an unfavorable fluctuation.

Meaning Exchange Control

"Foreign Exchange Control" is a method of state intervention in the imports and exports of the country, so that the adverse balance of payments may be corrected". Here the government restricts the free play of inflow and outflow of capital and the exchange rate of currencies.

According to Crowther: "When the Government of a country intervenes directly or indirectly in international payments and undertakes the authority of purchase and sale of foreign correncies it is called Foreign Exchange Control"

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OBJECTIVES OF FOREIGN EXCHANGE CONTROL

1.Conservation of Foreign Exchange Exchange control may be introduced by the monetary authority to conserve the gold, bullion, foreign exchange currencies, etc., i.e., foreign exchange resources, of the country. It may be necessary to ensure the availability of sufficient amount of foreign exchange needed to buy essential foreign goods.

2.Protecting the Interest of Home Producers: Exchange control may be used for giving protection to domestic producers by restricting the competition from foreign traders through import control..

Recovery of External Debt: The Government may use the exchange control device to obtain foreign exchange needed for repaying its foreign loans. 4. Effective Economic Planning For successful economic planning, foreign trade has to be coordinated with planned programs and the outflow of capital should be restricted in order to make it available to domestic industries. 5. To prevent Spread of Depression Depression in a big country may spread from country to country via international economic relations. Exchange control may work a a preventive against such spread of depression by controlling the main doors-imports and exports.

METHODS OF EXCHANGE CONTROL There are two methods of exchange control. One is direct and other is indirect.

Direct Method: The central bank of the country, which is exchange control authority, adopts a number of direct methods, which restrict the use and quantity of foreign exchange. They are as under. 1.Exchange Restriction-All foreign currencies are pooled with, the central bank which in turn sanctions and allocates than in accordance with the rules laid down by the government.

2.Allocation according to priorities: This is the simplest method. As the foreign currencies available with the central bank are always limited in quantities, it will allocate then to finance imports and to make other foreign payments. It will do so in accordance with certain principles of priorities. All essential items of imports such as food, raw materials, capital goods, intermediate products, etc will be accorded priorities in allocating foreign exchange over non-essential and luxury imports.

3.Multiple Exchange Rates: When a country establishes different exchange rates for earn of several categories of imports exports and capita transfers it is known as the methods of multiple exchange rates. This systern of exchange control is operated in w such a way that lie value of imports is reduced and the foreign value of exports is increased. The aim is to achieve the balance of payments equilibrium for the country by reducing imports and increasing exports.

Blocked Accounts Under this system of exchange control, payments for import are credited to blocked accounts in the name of the foreign exporters. Such account may be kept in the central bank of the debt or country. The creditors are prohibited for some time from drawing on them. However, they can be used in the controlling country where such accounts are located.

5.Clearing Agreements Under this method of exchange control, two trading countries agree to establish an account in their respective central bank through which all payments for export and imports are cleared. This method is known as bilateral clearing or clearing agreement of exchange clearing

6.Payments Agreements: Payment agreements are another form of bilateral agreements but they are wider in scope than clearing agreements. Beside trade transactions, they include various service transactions such as shipping charges, debt service, tourism, etc which are reflected in the balance of payments. A payments agreement is usually made for the repayment of the debt by one country to the other. Under this system of exchange control, a certain percentage of payments for imports by the credit or country are passed on to its clearing account for the repayment of its debt.

Indirect Methods:

a. Quantitative Restrictions Quantitative restrictions or commercial control include import restrictions, import embargoes, import quotas and buying policies of state trading corporations. All these lunit imports Quantitative

import controliestricts the amount (in value or quantity) of the commodity to be imported. The aim is to curtail value to correct disequilibrium in the balance of payments

(B) Export Bounties: A bounty on exports has an effect of raising the external value of the country giving the bounty. But export bounties are limited by the number of funds with the government. 

(c) Raising Interest Rates Changes in the interest rates within a country also influences its foreign exchange rate

When interest rate increases in a country, it attracts capital funds from other countries and prevents the outflow domestic funds to other countries. Consequently, the demand for its currency rises which raises its external valu and makes the foreign exchange rate favorable to it.