COURSE TITLE: Money, Banking and Financial Institutions
Maximum Marks: 100

Attempt all the questions:

1. Define the concept of inflation and explain inflationary process. Why should inflation be controlled? Explain the various measures to be adopted to control it. (20)

Ans: Inflation means a situation where prices of goods and services are increased by the reason of which the purchasing power of money decreases. Inflation is always expressed in terms of percentage. The main reason of inflation is a situation where aggregate demand is more than aggregate supply. But this is not single reason. In India, inflation process is caused due to various factors such as demand and supply factors, increase in cost of raw materials, weak infrastructure, policies of the government etc.

According to Pigou inflation takes place “When money income is expanding relatively to the output of work done by the productive agents for which it is the payment”. At another place he says that “inflation exists when money income is expanding more than in proportion to income earning activity.

RC. Hawtrey associates inflation with “the issue of too much currency”. T.E. Gregory calls it a state of “abnormal increase in the quantity of purchasing power”. In general, inflation may be defined as a sustained rise in the general level of prices brought about by high rates of expansion in aggregate money supply.

Government must try to control inflation because it’s not only increases cost of production but also but also makes poor people poorer. The effects of inflation on different sectors of the economy and sections of the society are as follows:

1)      Effects on production: Keynes felt that as long as there were unemployed resources in the economy a moderate or a mild dose of inflation might be in order, because this would lead to waves of optimism inducing businessmen to invest more. But this cannot go on forever because the limit is set by full employment ceiling, after which the prices start rising and moderate inflation starts assuming the nature of hyper-inflation.

2)      Effects on distribution: Inflation has the effect of redistributing income because prices of all factors do not rise in the same proportion. Entrepreneurs stand to gain more than wage earners or fixed income groups. Speculators, hoarders, black marketers and smugglers gain on account of windfall profits. Changes in the value of money also result in the redistribution of wealth, partly because during inflation there is no uniform rise in prices and partly because debts are expressed in terms of money. Inflation is a king of hidden tax, highly harmful to the poorer sections of society. Thus, poor become poorer.

3)      The entrepreneurs: When prices rise, producers, traders, speculators and entrepreneurs gain on account of windfall profits because price at a faster rate than the cost of production. Besides, there is time-lag between the price rise and the increase in cost. Moreover producers gain because the prices of their inventories (stock) go up due to inflation. This makes rich people richer causing misbalance in distribution of wealth.

4)      Debtors and Creditors: Debtors borrow from creditors to repay with interest at some future date. Changes in the price level affect them differently at different time periods. During inflation when the prices rise (and the real value of money goes down). The debtors pay back less in real terms than what they had borrowed and thus, to that extent they are gainers. On the other hand, the creditors get less in terms of goods and services than what they had lent and lose to that extent.

5)      Investors: Different kinds of investors are affected differently by inflation. An investor may invest in bonds and debentures which yield a fixed rate of interest or in real estate or equities (shares) whose returns (dividends) rise and fall with profits earned by the companies concerned. When prices rise, the returns on equities go up on account of the rise in profits. While the bond and debenture holders gain nothing as their income remains fixed. By the same logic, holders will lose during depression, while the debenture and bond holders gain.

Inflation must be controlled otherwise it turns into hyper inflation. Control of inflation should involve monetary and fiscal steps aiming at reducing the level of aggregate demand so as to equate it with the full employment output in the economy. The level of investment or consumption or both may be curtailed by increasing the number and the rates of direct and indirect taxes and by raising the rate of interest. The measure for controlling inflation can be divided into three broad categories:

1)      Monetary measures: The central bank of the country can curb inflation by restricting the supply of money and credit with the help of three important measures available to it. They are bank rate policy, open market operations, and varying the reserve requirement s of the member banks.

2)      Fiscal measures: The limitations of monetary measures make it important to make use of fiscal measures to curb inflation. Fiscal measures refer to taxation, government spending and public borrowings. Government should try to mop up, through taxation, as much purchasing power as possible without adverse effects in incentives to enterprises and investment. A decrease in government spending and an increase in government’s total tax revenue i.e. producing a surplus budget is an important fiscal measure which can successfully check inflationary pressures in the economy.

3)      Direct control: Many countries have adopted direct measures to control inflation. These include price control and rationing of essential commodities. Rationing and price control, however, have not been very effective in underdeveloped countries because of lack of competent and honest machinery to administer such measures. These have often led to the disappearance of goods from the market giving scope for black marketing, bribery and corruption.

Measures should be taken to expand the production of necessary goods at the expense of luxury goods because shortage of the necessary goods raises the prices much more rapidly than a shortage of luxury goods. Control of wages has often been suggested to check a wage-price spiral. During galloping inflation it may be necessary to apply a wage-profit freeze. Control of wages and profits keeps down disposable income and hence, the level of effective demand for goods and services. Efforts should be made to obtain as much foreign capital as possible. Investment financed by foreign capital is less inflationary. Every effort should be made to increase production. Preference should be given to investment in those projects which start yielding output at the earliest. Inflation is easy to control in its initial stages. Beyond a stage it starts feeding on itself and the inflationary problem assumes such dimensions that it becomes very difficult to control. 

2. What is credit creation? Explain how banks can create credit. What arc the limitations of credit creation? (20)

Ans: The banks create secondary deposits or derivation from the primary deposits. This creation of derivative deposits is known as Credit Creation.

Creation of Credit by Banks

Money is said to be created when the banks, through their lending activity, make net addition to the total supply of money in the economy. Thus, the giving of loans by the banks in the form of derivates deposits leads to the creation of money. The modern banks create deposits in two ways.

Firstly, in a passive way this results in primary or passive deposits.

Secondly, in a more active way this results in active or derivative deposits.

The bank creates passive when it opens a deposits account in the name of the customer who brings cash or cheques to be credited to his account. In this case, the rate of the bank is merely passive as it accepts the cash or the cheques brought by the customers and deposited them in his account. It is the primary deposits which later on form the basis of loan transaction by the bank. These primary deposits do not make any net addition to the stock of money in the economy. After keeping a small percentage of these deposit in cash, the bank utilities the balance for making loans and advances to the customer. The percentage of the primary deposits kept by the bank in cash is known as cash Reserve Ratio. The creation of these deposits can be explained with the help of an example.

Let us suppose that the bank grants a loan of Rs. 20,000 to his customers against some collateral security. What the bank actually does it that it opens an account in the name of the borrower and credit Rs. 20,000 to it. In any case, the bank does not pay Rs. 20,000 to the borrower in cash. The borrower may either withdrawn the entire amount at once or he may withdraw small accounts of money from time to time according to his requirements. Thus, by making loans the bank has at the sometime created new deposits in its books.

                Hence, the well-known maxim is that “Every loan creates a deposit”. Such actively created deposits lead to a net increase in the total supply of money in the economy. The active deposits are also created by the bank when it purchases securities or other forms of assets from the public. The actual process of multiple creation of credit may be explained thus:-

                When a bank grants loans to the borrowers, the loan money is created to his deposits account. Supposing, the borrower pays to his creditor, in connection with some business transaction, a cheque drawn upon his account with the bank. Let us further suppose that the creditor deposits the cheque in another bank in his account. The other bank now receives the primary deposits in the form of a cheque drawn upon the first bank. After keeping some cash as cash ratio the second bank may create another derivative deposit by giving loans to some borrowers. The second borrowers may make the payment to another creditor who happens to have a deposit account with the third bank. The third bank will know receive the primary deposits in the form of cheque drawn on the second bank. This process may be repeated until the total volume of derivative deposits created by all the banks would be a multiple of the initial amount created by the first bank.

The limitations of the credit creation process of commercial banks are:

a)      Availability of primary deposits: The commercial banks create credit only on the basis of primary deposits. They cannot create a large number of credits from a small primary deposit.

b)      Requisite cash reserve ratio: The size of the credit multiplier is inversely related to the cash reserve ratio. The higher the ratio, the smaller will be volume of excess reserve available and smaller will be volume of credit creation and vice versa.

c)       Banking habits of the people: The banking habit of the people also sets the limit for the capacity of banks to create credit. If the people don’t have banking habit and prefer to transact by cash and not by cheque, then multiple credit creation of the bank will not be possible.

d)      Availability of good collateral security: The availability of collateral securities also places a limit on credit creation of banks. If securities are not available in sufficient number, the banks cannot expand their lending activities and thus, cannot create credit.

e)      Credit policy of the Central Bank: The extent of credit creation also depends on the monetary policy of the Central bank. The Central bank provides a limit to the commercial banks to create credit and they are bound to follow it.

3. What is meant by money market? Discuss various constituents of money market and their functioning in India. (20)

Ans: Meaning of Money Market: The money market is not a well-defined place where the business is transacted as in the case of capital markets where all business is transacted at a formal place, i.e. stock exchange. The money market is basically a telephone market and all the transactions are done through oral communication and are subsequently confirmed by written communication and exchange of relative instruments.

According to the RBI, "The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government.

MONEY MARKET INSTRUMENTS (Constituents) or Structure of Indian money Market

The entire money market can be divided into two parts. They are

a)      Organised money market

b)      Unorganized money market.

Organised money markets are also known as authorised money market and unorganized money markets are known as unauthorized money market. Both of these components comprises off several components which are illustrated below with the help of a chart:

After studying above organizational chart of the Indian money market it is necessary to understand various components or sub markets within it. They are explained below.

1.       Call Money:  Call/Notice money is an amount borrowed or lent on demand for a very short period. If the period is more than one day and up to 14 days it is called 'Notice money' otherwise the amount is known as Call money'. Intervening holidays and/or Sundays are excluded for this purpose. No collateral security is required to cover these transactions

Features of Call Money:

i.         The call market enables the banks and institutions to even out their day-to-day deficits and surpluses of money.

ii.        Commercial banks, Co-operative Banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements.

iii.      Specified All-India Financial Institutions, Mutual Funds and certain specified entities are allowed to access Call/Notice money only as lenders.

iv.      It is a completely inter-bank market hence non-bank entities are not allowed access to this market.

v.        Interest rates in the call and notice money market are market determined.

2.       TREASURY BILLS MARKET: In the short term, the lowest risk category instruments are the treasury bills. RBI issues these at a prefixed day and a fixed amount. These are four types of treasury bills.

i.         14-day Tbill- maturity is in 14 days. Its auction is on every Friday of every week. The notified amount for this auction is Rs. 100 crores.

ii.        91-day Tbill- maturity is in 91 days. Its auction is on every Friday of every week. The notified amount for this auction is Rs. 100 crores.

iii.      182-day Tbill- maturity is in 182 days. Its auction is on every alternate Wednesday (which is not a reporting week). The notified amount for this auction is Rs. 100 crores.

iv.      364-Day Tbill- maturity is in 364 days. Its auction is on every alternate Wednesday (which is a reporting week). The notified amount for this auction is Rs. 500 crores.

A considerable part of the government's borrowings happen through Tbills of various maturities. Based on the bids received at the auctions, RBI decides the cut off yield and accepts all bids below this yield.

3. INTER-BANK TERM MONEY: Interbank market for deposits of maturity beyond 14 days and up to three months is referred to as the term money market. The specified entities are not allowed to lend beyond 14 days. The development of the term money market is inevitable due to the following reasons

i.         Declining spread in lending operations

ii.        Volatility in the call money market

iii.      Growing desire for fixed interest rates borrowing by Corporates

iv.      Move towards fuller integration between forex and money market

v.        Stringent guidelines by regulators/management of the institutions

4. CERTIFICATE OF DEPOSITS: After treasury bills, the next lowest risk category investment option is the certificate of deposit (CD) issued by banks and FIs.  CDs are issued by banks and FIs mainly to augment funds by attracting deposits from Corporates, high net worth individuals, trusts, etc. the issue of CDs reached a high in the last two years as banks faced with reducing deposit base secured funds by these means. The foreign and private banks, especially, which do not have large branch networks and hence lower deposit base use this instrument to raise funds.

The rates on these deposits are determined by various factors. Low call rates would mean higher liquidity in the market. Also the interest rate on one-year bank deposits acts as a lower barrier for the rates in the market.

5. INTER-CORPORATES DEPOSITS MARKET: Apart from CPs, Corporates also have access to another market called the inter- Corporates deposits (ICD) market. An ICD is an unsecured loan extended by one Corporates to another. Existing mainly as a refuge for low rated Corporates, this market allows funds surplus Corporates to lend to other Corporates. Also the better-rated Corporates can borrow from the banking system and lend in this market. As the cost of funds for a Corporates in much higher than a bank, the rates in this market are higher than those in the other markets. ICDs are unsecured, and hence the risk inherent in high. The ICD market is not well organised with very little information available publicly about transaction details.

6. COMMERCIAL PAPER MARKET (CP): CPs is negotiable short-term unsecured promissory notes with fixed maturities, issued by well rated companies generally sold on discount basis. Companies can issue CPs either directly to the investors or through banks / merchant banks (called dealers). These are basically instruments evidencing the liability of the issuer to pay the holder in due course a fixed amount (face value of the instrument) on the specified due date. These are issued for a fixed period of time at a discount to the face value and mature at par.

7. READY FORWARD CONTRACT: It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price. Such a transaction is called a Repo when viewed from the prospective of the seller of securities (the party acquiring fund) and Reverse Repo when described from the point of view of the supplier of funds.

4. Discuss the functions of the World Bank. Does its performance solve the capital scarcity problems of less developed countries? (20)

Ans: World Bank: A need arises to finance various projects in various countries to promote the development of economically backward regions. The United States and other countries have established a variety of development banks whose lending is directed to investments that would not otherwise be funded by private capital. The investments include dams, roads, communication systems, and other infrastructural projects whose economic benefits cannot be computed and/or captured by private investors, as well as projects, such as steel mills or chemical plants, whose value lies not only in the economic terms but also, significantly in the political and social advantages to the nation.

The loans generally are medium-term to long-term and carry concessional rates. Even though most lending is done directly to a government, this type of financing has two implications for the private sector. First, the projects require goods and services which corporations can produce. Secondly, by establishing an infrastructure, new investment opportunities become available for multinational corporations.

The World Bank or the International Bank for Reconstruction and Development (IBRD) was established in 1945 under the Bretton Woods Agreement of 1944. An International Monetary and Financial Conference were held at Bretton Woods, New Hampshire during July 1-22, 1944. The main purpose of the conference was finalisation of the Articles of Association of IMF and establishment of an institution for the reconstruction of the war shattered world economies. Thus, the conference has given birth to World Bank or International Bank for Reconstruction and Development (IBRD). World Bank was established to provide long-term assistance for the reconstruction and development of the economies of the member countries while IMF was established to provide short term assistance to correct the balance of payment disequilibrium.

Functions and objectives of World Bank

a)      To assist in the reconstruction and development of the territories of its members by facilitating the investment of capital for productive purposes.

b)      To promote private foreign investment by means of guarantee of participation in loans and other investments made by private investors and, when private capital is not available on reasonable terms, to make loans for productive purposes out of its own resources or from funds borrowed by it.

c)       To promote the long term balanced growth of international trade and the maintenance of equilibrium in balance of payments by encouraging international investment for the development of the productive resources of members.

d)      To arrange loans made or guaranteed by it in relation to international loans through other channels so that more useful and urgent projects, large and small alike, will be dealt first.

India as a less developed country and the World Bank

India is the founder member of the Bank and held a permanent seat for number of years on its Board of Executive Directors. India is one of the largest receivers of assistance since 1949. Upto June 2002, cumulative lending’s of the World Bank to India amounted to $ 26.69 billion in 187 loans. The total amount borrowed by India from the World Bank and the IDA till June 2002 amounted to $ 58.54 billion in 434 loans. This amounted to 11.6 per cent of the total loans and credits approved by the World Bank groups. During 2001-02, India received $ 893 million from the World Bank accounting for 11.22 per cent of its total loans. India is helped by the World Bank in its planned economic development through granting loans, conducting field surveys, sending study terms and missions and through rendering expert advice. The Bank also provides training to Indian personnel at EDI. It also helped India to solve its river water dispute with Pakistan.

The benefits desired by India from the World Bank are:

a)      India has received a lot of assistance from the World Bank for its development projects.

b)      Aid India Club was founded in 1950 by the efforts of the World Bank with a view to help India. This club is now called India Development Forum. This Forum had decided to give loans amounting to $ 600 crore to India for implementing its structural adjustment.

c)       The bank’s role in solving the Indus water dispute between India and Pakistan has been invaluable.

d)      General loans have also been granted by the World Bank to India, to be utilised as per its own discretion.

e)      As a member of the World Bank, India has become the members of International Finance Corporation, International Development Association and Multilateral Investment Guarantee Agency also.

f)       India has received technical assistance from time to time from the World Bank for its various projects. The Expert Team of the Bank has visited India and given valuable suggestions also.

g)      The massive population of India has always created problems in the economic development of the country. World Bank has been helping India in the population control programmes and urban development. For this purpose loans amounting to $ 495 crore have also been given to India.

h)      World Bank has been giving financial assistance to NGOs operating in India e.g. Leprosy Elimination, Education Projects, Child development service projects etc.

On the other hand, critics argue that the World Bank have endangered the economic freedom of India. The basic points of criticism are as follows:

a)      The World Bank has laid a great deal of emphasis on measures of economic liberalisation and more free play of market forces.

b)      A lot of stress has been laid on going very slow on the setting up of public sector enterprises including financial intermediaries and encouraging private sector.

c)       India’s dependence on World Bank has been increasing which is adversely affecting its economic freedom.

d)      The attitude of World Bank reflects the preference for free enterprise and a market oriented economy. It shows dissatisfaction with the general performance of economies which are based on planning and regulation. At different occasions the Bank has tried to undermine the Significance of our Planning Commission.

e)      The devaluation of Indian rupee in 1966 and 1991 was done at the insistence of the World Bank only.

India’s main problem till now has been the government’s incapacity to act rightly, firmly and effectively in time, on account of being more emotional to set ideologies and compromising attitude to safeguard the political party’s interest more than the national interest.

5. Write short notes on the following:      5x4=20

(a)Superiority of Keynes' analysis of Money and Prices over the classical analysis

Ans: Keynes does not agree with the older quantity theorists that there is a direct and proportional relationship between quantity of money and prices. According to him, the effect of a change in the quantity of money on prices is indirect and non-proportional.

Keynes complains “that economics has been divided into two compartments with no doors or windows between the theory of value and the theory of money and prices”. This dichotomy between the relative price level (as determined by demand and supply of goods) and the absolute price level (as determined by demand and supply of money) arises from the failure of the classical monetary economists to integrate value theory with monetary theory. Consequently, changes in the money supply affect only the absolute price level but exercise no influence on the relative price level.

Further, Keynes criticizes the classical theory of static equilibrium in which money is regarded as neutral and does not influence the economy’s real equilibrium relating to relative prices. According to him, the problems of the real world are related to the theory of shifting equilibrium whereas money enters as a “link between the present and future”.

The Keynesian reformulated quantity theory of money is based on the following:

1)      All factors of production are in perfectly elastic supply so long as there is any unemployment.

2)      All unemployed factors are homogeneous, perfectly divisible and interchangeable.

3)      There are constant returns to scale so that prices do not rise or fall as output increases.

4)      Effective demand and quantity of money change in the same proportion so long as there are any unemployed resources.

Given these assumptions, the Keynesian chain of causation between changes in the quantity of money and in prices is an indirect one through the rate of interest. So when the quantity of money is increased, its first impact is on the rate of interest which tends to fall. Given the marginal efficiency of capital, a fall in the rate of interest will increase the volume of investment.

The increased investment will raise effective demand through the multiplier effect thereby increasing income, output and employment. Since the supply curve of factors of production is perfectly elastic in a situation of unemployment, wage and non-wage factors are available at constant rate of remuneration. There being constant returns to scale, prices do not rise with the increase in output so long as there is any unemployment.

Under the circumstances, output and employment will increase in the same proportion as effective demand, and the effective demand will increase in the same proportion as the quantity of money. But “once full employment is reached, output ceases to respond at all to changes in the supply of money and so in effective demand. The elasticity of supply of output in response to changes in the supply, which was infinite as long as there was unemployment falls to zero. The entire effect of changes in the supply of money is exerted on prices, which rise in exact proportion with the increase in effective demand.”

(b)Central Bank

Ans: Central Bank: The central bank is the supreme monetary institution of the country. It is established, owned, controlled and financed by the govt. of the country. The design and control of the country’s monetary policy is its main responsibility. India’s central bank is the Reserve Bank of India. The nature of Central Bank is as follows:

a)      It is the head of all the banks of India. It is the supreme monetary institution of the country.

b)      They always work for national welfare of a country. They do not aim at earning profits.

c)       It is established, owned, controlled and financed by the govt. of the country.

d)      It does not compete with other financial institutions in the market.

The Central Bank plays a vital role in economic development of a country. It controls the whole monetary system and credit supply of a country. If there is absence of Central Bank, then the whole economic system of that country. So, a Central Bank is necessary in a country because:

a)      To issue currency notes in a country.

b)      To control the supply and creation of credit in the economy to maintain stability in the monetary system.

c)       To meet the financial requirements of the sectors of the economy.

d)      To successfully implement the monetary policies of the govt. of the country.

e)      To promote the foreign trade of the country through various policies.

(c) Non-bank financial intermediary

Ans: Financial intermediation is the modern term used for ‘Financial Institutions’. The financial intermediaries act as mediators to bring together the savers and users of capital. They mobilize money from the savers by selling securities to them, and lend the same to the borrowers. Broadly, the term financial intermediaries can be applied to a variety of institutions, some of which are listed below:

1)      Commercial Banks

2)      Insurance Companies           

3)      Provident Fund Organizations etc.

Role of Non-bank Financial Intermediaries

The non-bank financial institutions acting as intermediaries play a crucial role in bringing together the savers and the borrowers. The intermediation process of these institutions helps the individuals to invest their funds safely and enables business firms to borrow funds without problems. Acting as intermediaries, the non-bank financial institutions help the individuals, business firms and the nation as a whole in the following ways:

1)      The non-bank financial institutions help the individual investors by providing them triple benefits viz, low risk, steady return and capital appreciation.

2)      They help the business firms in securing funds at reasonable cost and in time. They take the risk of mobilizing savings from numerous small investors. The business firms are, thus, relieved of the problem of approaching small investors scattered throughout the country.

3)      The non-bank financial institutions also help the different sectors of the economy according to the priorities fixed by the Government from time to time.

4)      By providing financial help on softer terms to the enterprises set up in backward areas, theses institutions help in correcting regional imbalances in the country.

5)      When the programs of rapid industrialization get bogged down due to the inadequacy of finance, these non-bank financial institutions render valuable assistance in the form of loans, underwriting services or direct subscription of shares and debentures.

6)      They provide technical, financial and managerial assistance to entrepreneurs. These institutions undertake various promotional activities such as the formation of project ideas, conducing viability studies, the implementation of the projects, etc. Thus, financial institutions play a very crucial role in accelerating the pace of industrial development.

(d) Functions of Commercial Bank

Ans: Functions of Bank: Modern banks not only deal in money and credit creation, other useful functions management of foreign trade, finance etc. The meaning of modern banks is used in narrow sense of the term as commercial banks. The various functions of banks are given below:

A) Primary functions:

a)      Acceptance of deposits: It is the most important function of a bank. Under this function, bank accepts deposits from individuals and organizations and finances the temporary needs of firms.

b)      Making loans and advances: The second important function of banks is advancing loan. The commercial bank earns interest by lending money.

c)       Investments of Funds: Besides loans and advances, banks also invest a part of its funds in securities to earn extra income.

d)      Credit Creations: The Bank creates credit by opening an account in the name of the borrower while making advances. The borrower is allowed to withdraw money by cheque whenever he needs.

B) Secondary functions of a bank: This function is divided into two parts

1)      Agency functions: These functions are performed by the banker for its own customer. For these bank changes certain commission from its customers. These functions are:

a)      Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.

b)      Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.

c)       Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers.

d)      Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.

e)      Acting as Trustee and Executor: Banks preserve the wills of their customers and execute them after their death.

f)       Acting as Representatives and Correspondent: Sometimes the banks act as representatives and correspondents of their customers. They get passports, travelers tickets secure passages for their customers and receive letters on their behalf.

2)      General Utility functions: These are certain utility functions performed by the modern commercial bank which are:

1.       Locker facility: Banks provides locker facility to their customers where they can their valuables.

2.       Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.

3.       Gift cheque: Some banks issue gift cheques of various denominations to be used on auspicious occasions.

4.       Letter of Credit: Letter of credit is issued by the banks to their customers certifying their credit worthiness. Letter of credit is very useful in foreign trade.

5.       Foreign Exchange Business: Banks also deal in the business of foreign currencies.

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