Money and Banking

Bank refers to an institution, which accepts deposits, provides overdraft facility and grants loan for various purposes such as education, business, etc. The two types of banks are commercial banks and central bank. A commercial bank is a financial institution that accepts deposits from the general public and grant loans for investment with the aim of earning profit. Central Bank is the apex bank of a country. The Reserve Bank of India is India’s central bank. Commercial bank performs various functions such as accepting deposits, granting loans, financing foreign trade, providing overdraft facility, discounting bills of exchange, creating credit and providing locker facilities to customers. The central bank functions as a banker to both—government and commercial banks, issues currency notes, controls credit and money supply in the economy, acts as a lender of last resort etc. Commercial banks contribute to money supply by creating demand deposits. Credit created by banks in the form of loans is a multiple of deposits that they receive. Commercial banks have a potential to create multiple deposits out of the initial deposits, based on the money or credit multiplier. Central Bank adopts quantitative and qualitative methods to control the money supply in the economy. Quantitative methods aim to control the cost and availability of credit where as qualitative methods influence the use and direction of credit. The quantitative methods adopted by central bank to control credit are change in bank rate; cash reserve ratio, statutory liquidity ratio and open market operations. The qualitative methods adopted by central bank to control credit are margin requirement, rationing, direct action and moral suasion. Other Important Keywords: Primary Deposits, Secondary Deposit, Excess Reserves, Comparison between central bank and commercial bank, High powered Money.

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