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Bank Act As A Bridge
Between
Those Who Save And The Users Of
(Savers) Capital
(Investors)
Activate the Idle Resources of the
community and use them for
Productive Purposes
•Apex institution in the banking and financial
structure
•Plays a leading role in
•Organizing
•Regulating
•Supervising
•Developing the banking and financial
•System of a country.
Monopoly over note issue
Banker's bank
Adviser and banker to the government
Controller of credit
Given the sole monopoly of issuing currency .
These notes circulate throughout the country as legal tender
money..
Reasons
1. Brings about uniformity in note circulation.
2. Gives a central bank some direct control over ‘money supply’.
Sells and buys foreign currencies on behalf of the
government .Issues new loans etc on behalf of the
government
Advises to the government on financial, monetary matters and
various economic policies.
Receives the deposits of cash, cheques and drafts, etc., from
the governments.
Provides short term credit to the government by printing
money against its security, bills to finance government deficit.
•Maintains deposits of commercial banks.
•Provides guidance to all banks and regulates their
activities.
•Bank licensing, branch expansion, liquidity of assets,
management,
•Related to amalgamation and liquidation.
•Periodic inspection of bank.
banks are required to deposit a fixed ratio of their net total
liabilities (the CRR) with the Central Bank.
In addition to this the bank holds excess reserves with the
Central Bank to meet any clearing due to settlement with
other banks.
The surplus funds with the Central Bank can be used make
advances to banks if temporarily in need of funds, acting as
lender of last resort.
It means that if a commercial bank fails to get financial
accommodation from anywhere, it approaches the Central Bank
as a last resort. Central Bank advances loan to such banks
against approved securities
Clear and settle claims
between commercial banks(relating to cheques and
demand drafts)
by making transfer entries in their accounts.
•Adopts Quantitative And Qualitative
•methods to Control Credit.
•Known as Monetary Policy Of Central Bank
Which influence the volume of credit in the economy like open
market operations, bank rate policy, repo and reverse repo rate,
legal reserve ratio etc
Quantitative or selective credit control techniques are the ones
which influence the direction of credit in the economy like Margin
Requirements and Moral Suasion, Credit rationing
Credit Control
Quantitative Qualitative
Measures Measures
Margin
Bank Rate
Requirement
Open Market Rationing Of
Operation Credit
Liquidity
adjustment Moral Suasion
ratio
Legal reserve
ratio
Is the rate of interest at which Commercial bank borrows the
money from central bank for long run without any security deposit
Raises bank rate Reduces bank rate
Discourage commercial Encourage commercial bank
bank to borrow to borrow
Demand for loans falls Demand for loans rises
Is The Rate Of Interest At Which Central Bank Lend to or
from Commercial Banks for short run on some security deposit
Is the rate of interest
When the commercial banks
at which central bank
have surplus funds they can
lends money to
deposit the same with the
commercial banks for
central bank and earn
short period for some
interest for short period
security
Raises Repo rate Reduces Repo/Reverse rate
Discourage commercial Encourage commercial bank
bank to borrow to borrow
Demand for loans falls Demand for loans rises
•It is legal compulsion for the banks to keep a certain minimum
fraction of their deposits as cash.
•The fraction is called the Legal Reserve Ratio(LRR). The LRR is
fixed by the central bank.
•It has two components.
• It is percentage or certain It is the ratio or percentage
ratio of commercial banks of net total demand & time
net demand deposits & liabilities of commercial banks
times liabilities
which they have to keep with
• which it has to keep with them in
central bank
form of liquid assets in
• in form of liquid assets in government securities
government securities
Raises the rate of Reduces the rate of
minimum CRR/SLR minimum CRR/SLR
Reduces the lending Increases the lending
capacity of commercial capacity of commercial
bank bank
Refers To Buying And Selling Of Government Securities
And Bonds in the
Open Market By The Central Banks
Central bank sells Central bank purchase
government securities government securities
to commercial banks from commercial banks
Reduces the credit Increases the credit
capacity to offer loans capacity to offer loans
• Difference between the value of security and the amount
borrowed against that security.
• RBI can fix difference between margin requirements
RBI Raises The Margin RBI reduces The Margin
Requirements. Requirements.
Borrowers Will Get Less Borrowers Will Get more
Credit Against Their Credit Against Their
Securities Securities
Refers to written or oral advice given by the central bank to
commercial bank to
restrict or expand credit
Persuades members not Persuades members to
to advance credit for advance credit for
speculative speculative
Disallow bank from
Allow bank from entering
entering into certain
into certain transactions
transactions
Refers to the fixation of credit limits for
different business activity or for a particular
business sector
Reduces the Quota Increases the
for a particular credit Quota for a
sector like Real certain sector like
estate auto sector
Institution which receives funds from the public
Gives loans and advances to those who need them
Public Bank
Commercial banks
Private Bank
Foreign Bank
Basis Central Bank Commercial Bank
Nature Apex Institution Of Deals In Money And
The Country Credit Creation
Management Generally Owned By Both Private And
Government Govt. Owned
Currency Issue Monopoly Right To Do No Have Such
Issue Currency Note Right
Public Dealing No Public Dealing Generally Deals With
Public
Foreign Exchange Custodian Of Foreign Deals With The
Exchange Foreign Exchange
Objective Social Welfare Earning Profit
•Process of multiplying initial deposits of banks into a huge
amount.
•Banks create credit by advancing loans to its customers
out…..
•Of what they have received from the public.
•The amount of the initial fresh deposits
•The legal reserve ratio (LRR) the minimum ratio of deposit
legally required to be kept as liquid assets by the banks.
Assumed that all the money that goes out of
banks is redeposit into bank
Credit creation depends upon the value of the multiplier
1
Money Multiplier =
LRR
Credit Creation = Money Multiplier X Money Multiplier
Suppose
• Initial deposits in banks are Rs. 10000
• LRR is 20%.
1
Money Multiplier =
20%
= 5
Credit Creation = Money Multiplier X Money Multiplier
5 X 10000
Credit Creation =
= 50000
Commercial banks has to
keep a certain percentage
of their deposits with the
central bank.
Assume that the legal
reserve ratio (LRR) is
20%
LRR = CRR + SLR
in the P.N.B
P.N.B receives Rs. 8000 as
primary deposits
and keeps Rs. 1600 (20% of Rs. 8000) as cash
reserves and grants the balance amount of
Rs. 6400 as loans. to Y
in the HDFC
In the same way, the loan of Rs. 640O is
deposited in H.D.F.C bank, which keeps Rs.
1280 (as LRR) and the excess cash of Rs.
5120 is lent.
Bank Primary Legal reserve Credit creation
deposits ratio
Round 1 10000 2000 8000
Round 1 8000 1600 6400
Round 1 6400 1280 5120
- - -
- - -
Total 50000 10000 40000
Anything that is generally acceptable as a
means of exchange of
goods and services
The supply of money means the total stock of all the
forms of money (paper money, coins and demand
deposits of banks)
which are held by the public
at any particular points of time.
Money Supply
M1 M2 M3 M4
=
M1 + Saving of the people with post office
=
M1 + Net Time Deposits With the
Commercial Banks
=
M3 + Saving the with post offices (other than
in the form of National Saving Certificate)
Includes coins and papers notes held by the public
Deposits of the people held by the bank can be
withdrawn by cheque
Deposits held with the R.B.I of the financial institution
Like industrial bank of India, IMF , world bank etc.
