Chap 5 Money$&Bankimg

8/2/2019 Chap 5 Money$&Bankimg

1/21

Money and Banking


2/21

THE MEANING OF MONEY

Money is the set of assets in an economy thatpeople regularly use to buy goods andservices from other people.


3/21

Money

Moneyis anything that is generally accepted inexchange for goods or services.

Commodities have several disadvantages whenused as money, the most important of which isthat they deteriorate easily after a few trades.

Precious metal coins have been used for money,partly because of their durability.


4/21

Barter versus Monetary Exchange

A barter system (with no money) --- inefficient.

Money greases the wheels of exchange andthus, makes the whole economy moreproductive.

The Nature of Money


5/21

The Nature of Money

The functions of money:

Medium of exchange

Unit of account Store of value

Money = whatever serves as the medium of

exchange


6/21

Currencyconsists of coins and/or paper thatsome institution or government has created tobe used in the trading of goods and services and

the payment of debts. Currency in the form of metal coins is still used

as money throughout the world today.

The disadvantage of metal currency is that it isbulky.

Currency


7/21

Certain types of metals traditionally used incoins, like gold and silver, are not availablein sufficient quantities to meet our demands

for a monetary instrument. For these reasons, metal coins have for

centuries been supplemented by paper

currency, often in the form of bank notes.

Currency


8/21

Coins and paper money have been officiallydeclared to be money to be acceptable for thesettlement of debts incurred in financial

transactions. In effect, the government says, We declare these

instruments to be money, and citizens areexpected to accept them as a medium of

exchange.

Currency


9/21

Demand depositsare deposits in banks thatcan be withdrawn on demand, by simply writinga check.

It is a monetary instrument that has become"generally accepted" in exchange over the yearsand has now, by custom and tradition, become

money.

Demand Deposits And OtherCheckable Deposits


10/21

INDIAN FINANCIAL SYSTEM

The Indian financial system providers offinancial services are the following:

Central Bank

Banks

Financial Institutions

Money and Capital Markets


11/21

THE BANKING SYSTEM

The Banking Regulation Act of India-1949.

BANK: accepting, for the purpose of lending or

investment, of deposits of money from thepublic, repayable on demand or otherwise andwithdrawable by cheques, draft, order or

otherwise.


12/21

THE BANKING SYSTEM

Accepting Deposits

Lending Money


13/21

MONEY SUPPLY: THECOMPONENTS OF MONEY SUPPLY

Governed by Central Bank.

Concept of money supply : The sum ofcurrency with the public and demanddeposits with the banking system.

This is called as 'narrow money' andrepresented as M1.


14/21

The Components of Money Supply

The Report of the Second Working Group in 1970,

M1=Currency in circulation* + Demand Depositswith the Banking System + Other Deposits with theRBI

M2 =M1 + Post Office Savings Bank Deposits M3=M1 + Time Deposits with the Banking System

M4=M3 + Total Post Office Deposits (excludingNational Savings Certificates) (*Currency in

circulation = Currency with the public + Currencywith the commercial banks)

Broad Money (M3)


15/21

The Balance sheet of the RBI

The Balance Sheet RBI includes that thedated securities of the CentralGovernment include marketable securities,special securities, special non-interestbearing securities, and gold bonds.


16/21

Liabilities Assets

A. Monetary Liabilities (ML)

A1. Notes in circulationA2. Other Deposits:

a.Deposits of quasi-government and otherfinancial institutions

b.Balances in the accounts offoreign Central Banks andgovernmentsc.Accounts of internationalagencies such as the IMF, etc.A3. Deposits of Banks

(Reserves)

Financial Assets (FA)

A. Credit to GovernmentA1. RBI credit to the Center

a.Loans and Advances from theRBI to the Centerb.RBI holdings of Treasury Bills,

dated securities and rupeecoins and small coins

A2. RBI credit to the StateGovernments:

Loans and advances to theState Governments


17/21

Liabilities Assets

B. Non-monetary Liabilities(NML)

B1. Capital Account: (NetWorth)a.Paid-up Capitalb.Statutory Reservec.Contingency Reserve, etc.

B2. Government DepositsB3. IMF a/c No.1 (Since

1948)B4. Miscellaneous NMLse.g. Bills Payable, RBI

Employees Pension Fund, Co-operative Guarantee/ProvidentFunds (since 1964),Compulsory Deposit SchemeBalance, etc.

B. Credit to the CommercialSector

B1. Shares/bonds of financialinstitutionsB2. Ordinary debentures of theco-operative sector

B3. Debentures of co-operative

land mortgagebanksB4. Loans to financialinstitutionsB5. Internal bills purchased anddiscounted


18/21

Liabilities Assets

C. RBI's Gross Claims on BanksC1. Refinance of RBI to the

banksC2. Fixed investments incommercial banks'shares/bonds/debentures, e.g.Holding of shares of the SBI

D. Net Foreign AssetsD1. Gold coin and bullionD2. Eligible foreign securities

D3. Balances held abroadnetted for balances in IMFAccount No.1 minus India's

quota subscription in rupeesOther Assets (OA)A. Physical AssetsB. Others


19/21

High Powered Money

The RBI money together with the Governmentmoney constitutes the monetary base which isknown as High Powered Money.

i.e.High Powered Money (H) = Monetary liabilities ofthe RBI + Government money (GM)

= Currency with the public (C) + Reserves (R) +

Other Deposits with the RBI Reserves (R) = Vault Cash + Banks Deposits with

the RBI


20/21

Money Multiplier

The money multiplier approach is based on thefollowing equation

Ms = m.H

Where m is the money multiplier and Ms is thebroad money (M3) .

M3 is the sum of currency held by the public (C),

demand deposits with the commercial banks(DD) and the time deposits with the banks (TD).

or, M3 = C + DD + TD


21/21

Money Multiplier Money multiplier m = M3/H

= (C+DD+TD)/(C+R)

where R = (DD + TD) r

or r= Reserve Ratio=R/(DD+TD)

and Dividing the numerator and denominator byDD we have:

Documents

Chap 5 Money$&Bankimg