C

SS
MONEY AND BANKING
R
A
RM
PA
 Types of Money in our Economy

I
g W V V
Deposits with Bank Postal Deposit

C
Currency in circulation Deposits with RBI

p V W
Currency with
V
Currency with Bank Deposits Other

SS
public bank with RBI deposits with
RBI V V
W V
Demand Deposit Term Deposit Demand Deposit Term Deposit
&

↓
g W

Saving Account Fixed Deposit

Same as bank
L I

Current Account Recurring Deposit

/

R
...
A
Liquidity in Economics
RM

-
Liquidity: the ease with which an asset or security can be converted into ready cash without
affecting its market price

- Demand Deposit is more liquid than Term Deposit

Liquidity: Cash > Cheque > Bonds

PA

Fiduciary Money
Fiat currency
 Monetary Aggregates
-

RBI -> to check liquidity -

Fiduciary money (Mutual agreement)

↓ Eg: checks, bitcoins
Usable

M : Monetary Base/High Powered Money/Reserve Money

C
o
3 components:
-

1. Currency in circulation

SS
2. Bankers deposit with RBI
3. Other deposits with RBI (eg: deposits of Governmental/Quasi-Judicial authority)

·
l
M 1 : Narrow money
43 components
⑳
-

1. Currency with public

2. Demand Deposits
3. Other deposits with RBI
R Narrow Money
A
M :
2 M + Saving deposits with Post Office
1

7 Actual Money Supply

RM

-
M 3: M 1 + Time deposits with Bank -

7- Broad Money (M35 priority)

· M : M + All deposits with Post Office

43
-

I Liquidity Order
PA

M1 M 2 > M >
M

Money Multiplier 4% 4000 6000

- ->I
-

Loan
-10,000 -> Bank -> 10,000 12,000
L 15,000 C
↑
↓
Money multiplied
 MM = 1 = Money in Circulation
-
-

CRR Reserve Money

↓
CRR ↓ Money multiply ↑
CRR↑ Money multiply ↓

C
Value of Circulation of Money: No. of hands exchanged
I
I

SS
Eg:
E 100 to shopkeeper
represented as ‘V’
↓
Loader
↓
Books
↓
R
A
Refreshment
RM

↓
Theory by
Irving Fisher
PA

purchasing power of
↓ - money decreases

e
x +A
When Money Supply↑ keeping other factors constant (Velocity of

t circulation/transactions) -> Price level of goods A

eg:
Currency printing - Banks
Money Illusion
-

Given by Fisher

C
SS
R
A
RM
PA

130 countries were there when estd.

Basel Norms
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Basel is a place in Switzerland ↑ 1930

Headquarter of Bank of International Settlements (BIS): Basel, Switzerland

↓
Basel Committee, 1974 by G10
 3 norms -> India Pete follows
adopted BASEL I in the year 1999
BASEL I: 1988
-

-
Focused on Credit Risk
↑
Min. capital requirement at 8% of Risk Weighted Assets (RWA)
↳ Capital Adequacy Ratio

C
Eg:
-

Risk
-

Salaried employee: 100% 0

SS
Ratan Tata: 90% 10%
Ashneer Grover: 50% 50%
Vijay Mallya: 10% 90%
Microlending

+
Non-banking Financial Companies-MFI (NBFC-MFI)
R
Capital Adequacy Ratio: 15% of RWA
A
NBFC cannot accept Demand Deposits
: CRR/SLR maintenance: No
RM

BASEL II: 2004

+BASEL III: 2008

Tier 1
12.9%
-

-> Tier 2 ·
-
-
Capital

Tier 3
PA
 LAF: Liquidity Adjustment Facility

I ↓
Repo Rate Reverse Repo Rate

C
Liquidity Trap: A situation in economy where people love to hold their money despite of

II
any changes in interest rates which renders any Monetary Policy ineffective

SS
No spending
Speculative Demand is generally
happens when rates will increase
relatively inelastic
Speculative Demand: perfectly elastic
Rate: Interbank Money Transfer to

I
Money Market
e

Short-term loans
R I fulfil their CRR
Also called Offer Rate

↓
A
1. Call Money: to be paid within a day
2. Notice Money: to be paid within 2-14 days
LIBOR: London Interbank Offer Rate

⑧
RM

Capital Market
-
base
-
Long-term loans In India: MIBOR (Mumbai Interbank Offer
Rate)
Treasury Bills: issued by RBI
-
Removed: 31st Dec 2021
I
Maturity Bills: less than 1 year Now, it’s SOFR: Secured Overnight
3 types of maturity bills:
-
Financial Rate
1. 91 days
PA

2. 182 days
3. 364 days
They are always listed on discount rate
:
No rate of interest
Non Performing Assets (NPA): Delay is more than 90 days
-

Assets
+ 2
Regular Assets Stressed Assets NPA

↓X

C
Sub standard Doubtful Loss asset

SS
↓
Write off
Bad Banks: Financial entity setup to buy NPAs
I
Recovery of NPAs
2021 budget:
-

R
2 bad banks to be established
1. National Asset Reconstruction Company Ltd. (NARCL)
A
2. India Debt Resolution Company Ltd. (IDRCL)
RM

SARFAESI Act 2002

-

Full form: Securitisation and Reconstruction of Financial Assets and enforcement of

-

Security Interest Act

--
Provides power to the bank/any financial institution to seize the property of a defaulting
borrower
PA

-
Wilful Defaulter: a person who would not pay to banks even if he has the ability to do so
-

Insolvency and Bankruptcy code, 2016

-

W
Consolidates the existing laws on bankruptcy