TUTOR MARKED ASSIGNMENT
COURSE CODE: ECO-09
COURSE TITLE: Money, Banking and
Financial Institutions
ASSIGNMENT CODE: ECO-09/TMA/2020-21
COVERAGE: ALL BLOCKS
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.
Also Read: IGNOU B.Com Solved Assignment 2021 - 22
ECO - 01 IGNOU Solved Assignment 2021 - 22
ECO - 02 IGNOU Solved Assignment 2021 - 22
ECO - 03 IGNOU Solved Assignment 2021 - 22
ECO - 05 IGNOU Solved Assignment 2021 - 22
ECO - 06 IGNOU Solved Assignment 2021 - 22
ECO - 07 IGNOU Solved Assignment 2021 - 22
ECO - 08 IGNOU Solved Assignment 2021 - 22
ECO - 09 IGNOU Solved Assignment 2021 - 22
ECO - 10 IGNOU Solved Assignment 2021 - 22
ECO - 11 IGNOU Solved Assignment 2021 - 22
ECO - 12 IGNOU Solved Assignment 2021 - 22
ECO - 13 IGNOU Solved Assignment 2021 - 22
ECO - 14 IGNOU Solved Assignment 2021 - 22
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.
Post a Comment
Kindly give your valuable feedback to improve this website.