SCERT

12TH ECONOMY Learn from the Experienced

CHAPTER-6
BANKING

Introduction

1. Finance is the life blood of all the economic activities like trade commerce agriculture
and industry
2. Banking sector act as the backbone of modern business world

Historical development

1. Ricks Bank of Sweden established in 1656 is the oldest Central Bank in the world
2. It acquired the sole right of note issue in 1897
3. But the fundamentals and the art of Banking was developed by the bank of England
in 1864
4. It was the first bank of issue
5. Due to large number of Central banks established between 1921 and 1954 a
Resolution was passed by the international finance conference held at Brussels 1920
a. The South African Reserve Bank 1921
b. The Central Bank Of China 1928
c. The Reserve Bank Of New Zealand 1934
d. The Reserve Bank of India 1935
e. The central bank of Ceylon 1950
f. The bank of Israel 1954

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Commercial banks

1. Banks more specifically deals with deposit and loan services provided to corporation
or large /middle sized business- as opposed to individual members of the public and
small businesses
a. They do not provide long term credit
b. They have to maintain liquidity of assets

Functions of commercial banks

They function with profit motive by accepting public deposits and lending loans for
various investment purposes

1. Primary functions 2. Secondary functions 3. Other functions

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1. Primary functions

1. Accepting deposits
1. Commercial banks are mainly depend upon public deposits
2. There are two types of deposits, a. Demand deposit and b. Time Deposit

a. Demand deposits

a. Deposits that can be withdrawn by individual without any prior notice to the banks

b. Time deposits

a. Deposits that are made for certain committed time

b. For that bank pay higher interest on time deposits
c. This deposit can be withdrawn only after a specific time with proper return notice to
the bank

2. Advancing loans
a. Banks grant loans to individual and business
b. Commercial banks grant loans in a form of overdraft cash credit and discount bills of
exchange
2. Secondary functions
1. Secondary functions can be classified under three heads namely
2. A. Agency functions B. General utility functions and 3. Other functions

A. Agency functions
Commercial banks act as an agent of customers by performing various functions they
are 1. Collecting cheques, 2. Collecting income, 3. Paying expenses
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1. Collecting cheques

Bank collect cheques and bills of exchange on behalf of their customers through
clearing house facilities

2. Collecting income
Commercial banks collects evidence functions salaries rent and interest on investment
on behalf of their customers

3. Paying expenses
Commercial banks make the payment of various obligations of customers such as
telephone bills insurance premium school fees and rents

B. General utility functions

Commercial banks provide some utility services to customers they are

1. Providing locker facilities 2. Issuing Travellers cheque 3.Dealing in foreign exchange

1. Providing locker facilities

a. Commercial banks provide locker facilities for safe custody of jewellery e share
debentures another valuable items
b. Minimise the risk of theft at home
c. But banks are not responsible for the item in the lockers

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2. Issuing Travellers cheque

a. Bank issue Travellers cheque to individual for travelling outside the country
b. It is an easy way to protect money while travelling

3. Dealing in foreign exchange

a. Commercial banks help in providing foreign exchange to Businessman dealing in

exports and imports
b. But commercial banks need to take the permission of the central bank for dealing
in foreign exchange
Other functions
Transferring funds
a. Commercial banks do transferring of funds from one bank to another
b. Funds are transferred by means of draft, telephonic transfer and electronic transfer

Letter of credit
a. Commercial banks issue letter of credit to the customers to certify creditworthiness

Underwriting securities
a. Commercial banks also undertake the task of underwriting securities
b. Public has full faith in the creditworthiness of banks
c. Public do not hesitate in buying the securities underwritten by bank

Electronic banking
It includes services such as debit card, credit cards and internet banking.

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Money supply

a. when a bank lend 5 lacs to an individual it opens a demand deposit in the name of
the individual and it makes a Credit payment of 5 lacs in that account this leads to
the creation of demand deposit in that account.
b. It is to be noted that there is no payment in cash
c. Without printing additional money, the supply of money is increased

Credit creation
a. It means multiplication of loans and advances
b. Commercial banks receive deposit from the public and use the deposit to give loans
c. Loans offered are many times more than the deposit received by the bank this
function is known as credit creation

Collection of Statistics
a. Bank collect and publish statistics related to trade and commerce
b. Advise customers and the public authorities on financial matters

Primary/ Passive deposit and Derived/ Active deposit

a. The modern banks create deposit in two ways

b. They are primary deposit and derived deposit
c. When a customer gives cash in the bank and the bank creates a book kept in his
name called deposit it is known as primary deposit
d. When such a deposits is created without there being any Prior payment of
equivalent cash to the bank is called a derived deposit
e. With the help of primary deposits the bank makes loans and advances to its
customers
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f. Credit creation literally means multiplication of loans and advances every loan creates
its own deposits
g. Bank has to maintained the ratio between the total deposit they create and the cash
in their position
h. Example when a customer deposits a sum of rupees thousand the bank create
deposit of rupees thousand in his favour
i. Now bank has rupees thousand in its custody since it is required to keep only cash
reserve of 20 %, remaining 80% has to be lend out to the public

Role of commercial bank in economic development of a country

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Capital formation

a. Mobilize the small savings of the people through their network of branches all over
the country and make it available for productive purposes

Creation of credit

a. Bank create credit for development projects

b. Which leads to increase in production, employment, sales enterprises thereby faster
economic development

Channelizing the funds towards productive investment

a. Capital formation is not only the function of commercial banks

b. Pooled funds should be used for productivity areas
c. By increasing the productivity it leads to economic development

Increasing right types of industries

a. Bank grant loans and advances to manufacturers whose products are in great
demand
b. Manufacturers induct new methodology increase in turn increase the national income
of the country
c. Sometimes subprime lending is also done this leads to economic crisis, the kind of
Economics crisis we experienced in 2007-08 in the US
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Banks monetize debit

a. When commercial bank gives loan the manufacturers and Wholesale traders, they
cannot increase the sales without selling their goods
b. They give their goods on credit basis, which may lead to Locking Up of capital
c. As a result the production may also be reduced
d. Banks lend money by discounting bill of exchange so that economic activities will be
carried out without any interruption

Finance to government

a. Government it is acting as a promoter of industries in underdeveloped countries so

that it needs Finance
b. Bank provide long term credit to government by investing their funds in government
securities and short term Finance by purchasing treasury bills
c. RBI has given 68000 Crore to the Government of India in the year 2018-19
d. This is 99% the RBI's surplus

Employment Generation

a. After the nationalization of big banks, bank branches are opened frequently in many
cities as well as villages which lead to the creation of new employment opportunities

Bank Promote Entrepreneurship

a. Bank have assumed the role of developing entrepreneurship particularly in developing

countries like India
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b. New entrepreneurs take up the well formulated projects and provisions of counselling
services like technical and managerial guidance
c. Banks provide 100% credit for worthwhile project which are technically feasible and
economically viable
Non-Banking Financial Institutions (NFBI)

a. It is also called as non-banking financial company

b. It is a Financial Institutions that does not have a full banking licence or it is not
supervised by Central Bank
c. It doesn't carry on pure banking business
d. Receive deposits and give loans
e. They operate in both the money and the credit markets
f. Non-bank operations can be broadly classified into two categories 1.stock
exchanges and 2. other Financial Institutions which includes Finance Companies,
finance corporations, chit funds, building societies, issue houses, investment trust and
units trust and insurance companies
Central Bank

a. Reserve Bank or Monetary Authority it is an institution that manages State's

currency, money supply and interest rates
b. Central banks oversee the commercial system of their respective countries

Functions of central bank (reserve Bank of India)

a. The Reserve Bank of India is India's Central banking institution

b. It controls the monetary policy of Indian rupee
c. It started its operation on 1st April 1935
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d. By the act of Reserve Bank of India Act 1934

e. Original share capital was divided into shares of rupees hundred each fully paid, it
was only entirely by private shareholders
f. After independence the RBI was Nationalised on 1st January 1949

Monetary Authority
a. It controls the money supply in the economy
b. Maintain healthy Balance of payments
c. Attain financial stability
d. control inflation
e. Strengthen banking system

The issuer of currency

a. The objective is to maintain the currency and credit system of the country
b. RBI is a sole authority to issue currency
c. It takes action to control the circulation of fake currency

The issuer of Banking licence

a. As per section 22 of the Banking Regulation Act every bank has to obtain banking
licence from RBI

Banker to the government

a. It act as a Banker to both Central and state governments

b. It provides short term credit

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c. It manages issue of government loans, servicing the government Debt outstanding

and nurturing the market for government securities
d. Advises the government on banking and financial subjects

Banker's Bank

a. RBI is the bank of all banks in India it provides loan to banks, accept the deposit
of banks and rediscount the bill of banks
Lender of last resort

a. The banks can borrow from the RBI by keeping banks eligible securities as collateral,
at the time of crisis when there is no other sources
Act as clearing house

a. For settlement of Banking transaction RBI manages 14 clearing houses

b. It facilitates the exchange of instruments and processing of payment instructions

Custodian of Foreign Exchange Reserves

a. It act as a custodian of FOREX

b. Indian Ministers and for the provision of Foreign Exchange Management Act
FEMA,1999
c. RBI buys and sells foreign currency to maintain the exchange rate of Indian rupees
vs foreign currencies

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Regulator of economy

a. It controls the money supply in the system

b. Monitor different indicators like GDP inflation etc.

Managing government securities

a. RBI administers investments in institutions
b. When they are specified minimum proportions of the total assets/ liabilities in
government securities
Regulator and supervisor of payment and settlement system

a. The payment and settlement systems act of 2007 give RBI oversight authority for
the payment and settlement system in the country
b. RBI focus on the development and functioning of the safe secure and efficient
payment and settlement mechanism

Developmental role
a. Development of the quality banking system in India and ensuring the credit
availability to the productive sectors of the economy
b. It also expands its access to affordable financial services and promoting financial
education and literacy

Publishers of monetary data and other data

a. RBI maintains and provide all essential banking and other economic data formulating
and critically evaluating the economic policies in India
b. RBI collects and publishes data regularly

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Exchange Manager and controller

a. RBI represents India as a member of the International Monetary Fund

b. Most of the commercial authorised dealers of RBI

Banking ombudsman scheme

a. RBI introduced the banking ombudsman scheme in 1995
b. Complainants can file their compliance in any form including online and can also
appeal to the ombudsman against the awards and the other decisions of the banks

Banking codes and Standards Board of India

a. To measure the performance of bank against courts and Standards based on the
established Global practices RBI has set up banking codes and Standards boards of
India
Credit control measures

a. The Reserve Bank of India controls the Credit System by the Reserve Bank of India
Act 1934 and the Banking Regulation Act of 1949
b. The credit control measures are of two types they are
Quantitative or general methods and Qualitative or Selective method of credit control
Methods of credit control

Quantitative or General Methods

Bank rate policy

a. The central bank of a country prepared to rediscount the first class securities

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b. Central bank is the only lender of the last resort, the bank rate is normally higher
than the market rate
c. Central Bank wants to control the credit, it will rise the bank rate and vice versa
d. Hence borrowing will be discouraged and will lead to contraction of credit

Open market operation

a. In narrow sense:
Central Bank starts the Purchase and sales of government securities in the money
market
b. In broad sense
a. The central bank purchase and sale not only government securities but also other
proper eligible securities like bills and securities of private concern
b. When the banks and private individual purchases securities they have to pay for the
securities to the central bank

Variable reserve ratio

It is of two types cash reserve ratio and statutory liquid ratio

a. Cash reserve ratio
a. Central Bank controls credit by changing the cash reserve ratio
b. When the commercial bank have excess cash reserve by which they create too much
of credit, this will be harmful to the economy
c. The central bank will raise the cash reserve ratio, for that the commercial banks
required to maintain amount with the central bank
d. If Central Bank decide that the commercial banks should increase the volume of the
credit in revival of the economy, central Bank will lower down the cash reserve ratio
to expand the lending capacity

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e. Variable cash reserve ratio is an objective of monetary policy was first suggested by
J.M. Keynes
f. It was first followed by Federal Reserve system in United States of America
g. If CRR is high the commercial bank’s capacity to credit will be lower

b. Statutory liquid ratio

a. The amount which a bank has to maintain in the form of cash, gold or approved
securities
b. The quantum is specified as some percentage of the total demand and time liabilities
of a Bank
Qualitative are selective method of credit control

a. It is a method which are directed towards the diversion of credit into particular uses
or channels in the economy
b. The objective is to control and regulate the flow of credit into particular industries
or businesses
The methods of credit control under selective methods are
a. Rationing of credit
b. Direct action
c. Moral persuasion
d. Method of publicity
e. Regulation of consumers credit
f. Regulating the marginal requirements on security loans

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Rationing of Credit

a. It is the oldest method of credit control

b. It was first used by the bank of England at the end of the 18 century
It is generally two types
The variable portfolio ceiling and the variable capital asset ratio
a. The variable portfolio ceiling is a system in which the central bank fixes ceiling on
maximum amount of loans and advances for every commercial bank
b. The variable capital asset ratio it is a system by which the central bank fixes the
ratio with the capital of the commercial banks should have to the total Assets of
the bank
Direct action

Direct action against the erring banks can take the following forms
a. Central Bank may refuse to altogether grant discounting facilities to such banks
b. Central Bank may refuse to sanction for other financial accommodation to the banks
whose existing borrowing are to be excess of its capital and Reserves
c. Central Bank May start charging penal rate of interest on money borrowed by a bank
beyond the prescribed limit
Moral suasion

a. This method is frequently adopted by the central bank, under this method central
bank gives advice and then request and persuade the commercial bank to co-operate
with central Bank in implementing its credit policies

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Publicity

a. The central bank in order to make the policies successful they take the course in
medium of publicity
b. Policy will be effectively successful only when an effective public opinion is created
in its favour
Regulations of consumer’s credit

a. The down payment is raise and the number of instalments is reduced for the credit
sale
Changing in the marginal requirement on security loans

a. This system is followed in US

b. The board of Governors of the Federal Reserve system will be given the power to
prescribe margin requirement for the purpose of preventing and excessive use of
credit for Stock Exchange speculation
b. This system is especially intended to help Central Bank in controlling the volume of
credit used for speculation in securities under the securities exchange act of 1934

Reserve Bank of India and rural credit

a. The Reserve Bank of India not only see the monetary regulations but also it take
care the development aspects of all sectors mainly agriculture and industry

Role of RBI in agriculture credit

a. RBI plays very Vital role in Agriculture Finance in India
b. In order to fill the gap of inadequacy of the formal agencies to carter the huge
requirements of the agriculture sector
c. RBI set up a separate agriculture credit department
d. But the volume of informal loans has not declined sufficiently
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Functions of agriculture credit Department

a. It maintains an expert to study all questions on agriculture credit

b. It provides expert advice to Central and state government state Cooperative another
banking activities
c. Finance rural sector through eligible institutions engaged in the business of
agriculture credit and to co-ordinate their activities

d. The duty of RBI in agriculture credit is much restricted as it functions as a ex-officio

capacity it could not land directly to the farmers
e. But the supply of rural credit was done through the mechanism of refinance with
specified institutions in rural credits

f. Primary societies may borrow from Central Cooperative bank and from them state
cooperative banks will borrow

g. RBI provides medium term loans for exceeding 15 months to 5 years for reclamation
of land, construction of irrigation works, purchase of machinery

h. Reserve Bank of India also provide long term loans to finance permanent changes in
land and also for the redemption of old debts

i. With the establishment of NABARD- national Bank of agriculture and rural

development. All the functions of the RBI related to agriculture credit had been taken
over by NABARD since 1982

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The Agriculture Refinance Development Corporation

a. In order to get medium term and long term loans farmers face a lot of difficulties in
getting them
b. Only organisation which provide long term credit is land Development Banks but it
has only limited success
c. The credit requirement in agriculture sector are increasing year after year
d. In order to bridge the gap in agriculture Finance and extend the credit in agriculture
development, an organisation was setup called the agricultural finance Development
Corporation was established by an act of the Parliament from 1st July 1963

Objectives of Agricultural finance Development Corporation

a. It provides funds to refinance by means of eligible institutions such as the central
Land Development Banks, state Cooperative banks and scheduled banks

b. To subscribe to the debentures floated by the central Land Development Banks,

cooperative banks, and scheduled banks provided they were approved by the RBI

Regional rural banks

a. Among the 20 points of Economic program ,the most important point given by Mrs
Indira Gandhi during emergency was the liquidation of rural indebtedness by stages
and provide institutional credit to farmers and artisans in rural areas
b. For that government of India set up regional rural banks on 1975
c. The share capital of regional rural banks is subscribed with central government 50%
d. The state government concerned 15%
e. And the sponsoring commercial bank 35%

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f. Main objective of RRB is to give credit to small and marginal farmers, agricultural
labourers, artisans, and small entrepreneurs to develop agriculture, trade, commerce,
industry and other productive activities in rural areas

Concessions to RRBs
a. The sponsor banks provide managerial and financial assistance to RRBs
b. It provide concessions such as lowest rate of interest 8.5% from the sponsor banks
c. The cost of staff deputed to RRBs and training expenses of RRB staff are borne by
the sponsor Bank

RBI has granted many concession to RRBs

a. They are allowed to maintain cash reserve ratio at 3% and statutory liquid ratio at
25%
b. They provide refinance facility through NABARD
NABARD and its role in Agriculture credit

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a. Short term credit as well as medium term and long term credit to agriculture through
state level cooperative banks and Land Development Banks

b. RBI has also set up the Agricultural Refinance Development Corporation to provide
refinance support to the banks to promote programs of agriculture development
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a. NABAD was set up in July 1982 by an act of the Parliament take over the functions
of ARDC and the refinancing functions of RBI in relation to cooperative banks and
RRBs
b. NABARD is contributed 50% by RBI and another half by the government of India
c. Government of India nominates three of its Central Board directors on the board of
NABARD
d. Deputy Governor of RBI is appointed as chairman of NABARD

Functions of NABARD

a. It act as a refinancing institutions for production and investment credit to agriculture,

small scale industries, cottage and village industries, handicrafts and rural crafts and
real artisans by promoting integrated rural development

b. It provide short term and long term credit to State Cooperative banks, RRBs, LDB,
and other Financial Institutions approved by RBI

c. NABARD gives long term loans for 20 years for state government and enable them
to subscribe the share capital of cooperative credit society

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d. NABARD gives long term loans to any institution approved by the central government
are contribute to the share capital or invest in securities of any institutions
concerned with agriculture and rural development

e. NABARD has the responsibility of coordinating central and state government, NITI
Aayog, and other all India and state level institutions interested with the
development of small scale industries, village and cottage industries, rural crafts,
industries in the tiny and decentralized sector

f. It is the responsibility to inspect RRBs and cooperative banks other than primary
cooperative societies

g. It maintains the research and development fund to promote research in agriculture

and rural development

Reserve Bank of India and Industrial Finance

a. Industries get finance from commercial under term will be very much limited.
b. Commercial banks lend for short-term only because they get short term deposit from
the public
Institutional Setup

All India level institutions

a. Industrial Finance Corporation of India
b. Industrial credit and Investment Corporation of India (ICICI)
c. Industrial Development Bank of India (IDBI)

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State level institutions

a. State financial corporations (SFCs)

b. State Industrial Development Corporation (SIDCs)

Industrial Finance Corporation of India (IFCI)

a. This was the first chain of establishment of financial corporation to provide financial
assistance for industrial development
b. IFCI was established on 1st July 1948, under the act of the Parliament

It provides assistance to the industrial concerns are

1. Are long term loans both in rupees and foreign currencies

2. Underwriting of equity preference and debenture issues
3. Subscribing to equity preference and debenture issues
4. Guaranteeing the differed payments in respect of machinery imported from abroad or
purchase in India
5. Guaranteeing of loan raised in foreign currency from foreign financial institution
6. Financial assistance from IFCI can be availed by any limited company in the public
private or joint sector or by a cooperative society incorporated in India
7. financial assistance will be available for setting up of new industrial projects and
also for expansion and diversification, renovation or modernization of existing ones
8. It also provide financial assistance on concessional terms for setting up of industrial
projects in industrially less developed districts in the states or union territory is
notified by the government

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The IFCI raises its resources by

a. Issue of bonds in the market

b. Borrowing from Industrial Development Bank of India and the central government
b. Foreign credit secured from foreign Financial Institutions and borrowings in the
international capital markets
Industrial credit and Investment Corporation of India (ICICI)

Functions of ICICI
1. Assistance to industries
2. Provision of foreign currency loans
3. Merchant banking
4. Letter of credit
5. Project promotion
6. Housing loans
7. Leasing operation
a. This was set up in 5th January 1955 as a joint stock company on the advice of
three men mission sponsored by the World Bank, the Government of USA and the
Government of India
b. The principal function of this institution is to channelize the World bank funds to
industry in India and also to help build up the capital market
c. Initially the capital of ICICI was held by private companies, institutions and individuals
d. But now a large part of its equity capital is held by public sector Institution such as
banks, LIC, GIC and its subsidiaries
e. Since its Inception nearly 50 percentage of its disbursement had been in foreign
currency

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f. World bank has been the single largest source of such funds
g. Since 1973 the ICICI has entered the international capital market also for raising
foreign currency loans
h. The major portion of its rupee resources is raised by way of debenture in the
capital market
i. ICICI also borrowed from the Industrial Development Bank of India and the
government
j. The major portion of its assistance has gone to the private sector

IDBI- industrial Development Bank of India

a. The main objective of creating IDBI is to co-ordinate the activities of other Financial
Institutions including banks
b. IDBI Bank was wholly owned subsidiary of The Reserve Bank of India up to February
15 1976
c. It was delinked from the RBI with effect from February 16, 1976 and made as an
autonomous Corporation fully owned by the government of India

Functions of IDBI

a. Assistance to other financial institutions

b. Direct assistance to industrial concerns either on its own or participation with the
other institutions
c. IDBI provide refinance in respect of term loans to industrial concerns given by by
the IFC, SFC, other Financial Institutions notified by the government of India,
scheduled banks, and state cooperative banks

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The special provisions of the IDBI is that

a. It created a special fund known as the development assistant fund
b. The fund is to provide assistance to industries which require heavy investment with
low anticipated rate of return
c. Such industries were not able to get assistant in a normal course
d. The finance for exports was also undertaken by the IDBI till the establishment of
EXIM bank in March 1982

State level institutions

State financial corporations

a. The Government of India passed in 1951, the state Financial Corporation Act and S
tate financial corporation was set up in many states
b. The main objective of state financial corporation was to develop the small and
medium industrial units in the respective States
c. In some cases the extent to neighbouring States as well
d. The state Finance Corporation provide loans and underwriting assistance two
industrial units having paid up capital and reserves not exceeding 1 crore
e. The maximum amount that can be sanctioned to an industrial concern by State
Finance Corporation is 60 lakhs
f. State Finance Corporation depend upon industrial Development Bank of India for
refinance in respect of the term loans granted by them
g. Operation can also make temporary borrowing from the Reserve Bank of India and
borrowing from IDBI and by the sales of bonds

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State Industrial Development Corporation (SIDCO)

a. It provides financial assistance to industrial concerns by way of loan guarantees and

underwritings of a direct subscription to shares and debentures
b. Undertake various promotional activities, such as conducting techno Economic
Services, project identification, preparation of feasibility studies and selection and
training of entrepreneurs
c. Joint sector project in Association with private promoters
d. SIDCO take 26%, private co-promoters take 25 percentage of the equity and the rest
is offered to the investing public
e. They undertake development of industrial areas by providing infrastructural facilities
and initiation of new growth centre
f. They also administrate various state government incentive schemes
g. They also borrow through bonds and accept deposits

Monetary policy

a. It is a macroeconomic policy laid down by the central bank towards the management
of money supply and interest rate
b. This economic policy used by the government to achieve macroeconomic objectives
like inflation, consumption, growth and liquidity
c. The monetary policy gained its significance after the World War II
d. The concept was initiated by Milton friedman who associated with the doctrine of
monetarism and who received Nobel Prize in 1976
b. He boldly return in his book monetary history of the United States in 1867- 1976
that the Great Depression of the 1930's was largely the outcome of the bungling in
monetary policies of the Federal Reserve system

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Monetary policy: Expansionary vs contractionary

Expansionary policy
a. It is a cheap money policy, it maintains short-term interest rate at a lower than
usual rate which increase the total supply of money in the economy
b. Is mainly used to combat unemployment
c. Credit will be given on less interest rate to expand business
d. Which boosts short term growth as measured by Gross Domestic Product growth
Contractionary Policy
a. This monetary policy is dear money policy
b. It maintains short term interest rates are higher than usual or which slow down
money supply
c. This slows down short term economic growth and lesson inflation
d. Contractionary money policy can lead to increased unemployment and depressed
borrowing and spending by consumers and businesses
e. Which leads to economic recession if implemented too vigorously

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Objectives of monetary policy

It serves the function of stabilization and maintaining proper equilibrium in the

economic system
1. Neutrality of money
2. Stability of exchange rates
3. Price stability
4. Full employment
5. Economic growth
6. Equilibrium in the Balance of payments

1. Neutrality of money
a. Economist like Wicksteed, Hayek, and Robertson are the chief exponents of neutral
money
b. Monetary Authority should aim at neutrality of money in the economy
c. Monetary changes are the root cause of all economic fluctuations
d. Monetary change causes distortion and disturbances in the proper operation of the
economic system
2. Stability of exchange rates
3.
a. When there was disequilibrium in the Balance of payments of the country, It can be
automatically corrected by movements, it is popularly known as
1. Expand currency and credit when gold is coming in
2. Contract currency and credit when gold is going out
b. This system will correct the disequilibrium in the Balance of payments and exchange
rate stability will be maintained

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3. Price stability

a. Economist like Crustave Cassel and Keynes suggested price stabilization as a main
objective of monetary policy
b. Stable prices repose public confidence
c. Promote business activity and insurance equal distribution of income and wealth
d. There will be a general wave of prosperity and welfare in the community
e. Price stability does not mean price rigidity or price stagnation
f. Increase in the price level provides for economic growth
g. It Keeps all virtues of a stable price

4. Full employment

a. During depression, problem of unemployment increase rapidly

b. It is regarded as a socially dangerous, economically wasteful and morally deplorable
c. Full employment was considered as the main goal of monetary policy
d. With the publication of Keynes general theory of employment, interest and money in
1936 he emphasised the main objective of monetary policy is full employment

5. Economic growth

a. When the real per capita income of a country increases over a long period of time
b. Increase in the total physical or real output, production of goods for the satisfaction
of human wants
c. Monetary policy should promote sustained and continuous economic growth by
maintaining an equilibrium between the total demand for money and Total production
capacity
d. Providing favourable condition for saving and investment

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6. Equilibrium in the Balance of payments

a. Equilibrium in the balance of payment is another objective of monetary policy it

emerged after world war
b. This is the problem of international liquidity on account of the growth of World
Trade at a faster speed than the world liquidity
c. Increasing of deficit in the Balance of payments reduce the liability of economy to
achieve other objectives
d. Many less developed countries have to cut their imports which adversely affects
development activities

Recent Advancement in Banking Sector

E banking

a. Online banking is also known as internet banking, it is an electronic payment

system, customers can do that financial transaction through the Financial Institutions
website
b. The online banking system typically connect the core banking system operated by
banks and it is contrast to the traditional way customers accessed banking system
c. Today a virtual banks cost lower than the traditional banks

RTGS and NEFT

a. Inter-bank transfer enables electronic transfer of funds from the account of the
remitter in one bank to the account of the beneficiary maintained with other bank
branch
b. There are two system of inter-bank transfer they are RTGS and NEFT
c. Both systems are maintained by RBI
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d. NEFT operates in half hourly batches

e. At present there are 23 settlements from 8am to 7pm all working days including
working Saturdays
f. Therefore beneficiary can expect to get the credit for the transaction between 8:00
a.m.to 5.30pm and all working days including working Saturdays
g. For transaction settled in the 6:30pm to 7pm batches the credit will be affordable
either on the same day or on the next working day

Automatic Teller Machine

a. Automatic teller machine was first introduced in 1967

b. The next revolution in automatic teller machine is to involve contactless payments
like Google pay, apple pay, paytm, ect

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Paytm

a. It is a Payments Bank, in August 2015 paytm received licence from RBI to launch
payments Bank
b. Vijay Shekhar Sharma who was the founder of ATM he holds 51 Percentage share,
one97 communications holds 39 % of share and 10 percentage will be held by
subsidiary of one97 and Sharma

Debit Card and Credit Card

a. Debit Card allows the holder to transfer money electronically from the bank account
when making a purchase
b. Credit card is a payment card enable the card holder to pay the merchants for goods
and services based on the cardholder's promise to pay them for the amount so paid
plus the other agreed charges
c. Card holder can borrow money for payments to the merchant as a cash advance

Recent issues

a. Once the borrower fails to make interest on principal payments for 90 days
b. The loan is considered to be a non-performer Asserts (NPA)
c. As the size of the NPA is estimated to be around 10 lakh crores
d. The government is forced to infuse capital from the taxpayers money
e. In 2018-19 the Government of India has infused 68000 crores into the banking
system
f. Finally it affects the common people

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Merger of banks

a. Union Cabinet decided to merge all the remaining five associate banks of State Bank
groups of India in 2017
b. After the Act was passed in the Parliament the subsidiary banks have cease to exist
c. The five associate banks were state Bank of Bikaner and Jaipur state Bank of
Hyderabad, state Bank of Mysore, state Bank of Patiala, state bank of Travancore
state Bank of India and state bank of Saurashtra

Money market
a. Money market is a mechanism through which short term funds are loaned and
borrowed
b. Financial Institutions which handle the Purchase, sale and transfer of short term
credit instruments
c. Commercial banks accepting houses, non-banking institutions and the central bank
are the institution catering to the requirements

Capital market
a. It is a part of financial system which is concerned with raising capital by dealing in
shares, bonds and long term Investments
b. Investment instruments like Bond, equity and mortgages are traded is known as the
capital market

Demonetisation

a. It is an act of stripping a currency unit of its status as legal tender

b. The currency is pulled out form the circulation
c. Often be replaced with new coins or notes

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d. On 8 November 2016 the Indian Prime Minister Mr Narendra Modi announce the
demonetization of all 500 and thousand banknotes of the Mahatma Gandhi series

Objectives of demonetisation
1. Removing black money from the country
2. Stopping of corruption
3. Stopping the refund
4. Curbing fake notes

GOOD LUCK

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