1.Explain the role of banks in economic development.
a)Removing the deficiency of capital formation:In any economy, economic development is not possible unless there is an adequate degree of capital accumulation (or) formation. Deficiency of capital formation is the result of low saving made by the community. The serious capital deficiency in developing economies is reflected in small amount of capital equipment per worker and the limited knowledge, training and scientific advance. Banks stimulate saving and investment to remove this deficiency. A sound banking system mobilizes small savings of the community and makes them available for investment in productive enterprises. The important implications of this activity include:
i) Banks mobilise deposits by offering attractive rates of interest and thus convert savings into active capital. Otherwise that amount
would have remained idle.
ii) Banks distribute these savings through loans among productive enterprises which are helpful in nation building.
iii) It facilitates the optimum utilization of the financial resources of the community.
b) Provision of finance and credit: Banks are very important sources of finance and credit for industry and trade. It is observed that credit is the lubricant of all commerce and trade. Hence, banks become nerve centers of all trade activities and therefore commerce and trade could function in the presence of sound banking system. The banks cover foreign trade transactions also. Big banks also undertake foreign exchange business. They help in concluding deferred payments, arrangements between the domestic industrial undertakings and foreign firms to enable the former import machinery and other essential equipment.
c) Extension of the size of the market: Commercial bankers help commerce and industry in yet another way. With the sound banking system, it is possible for commerce and industry for extending their field of operation. Commercial banks act as an intermediary between buyers and the sellers. Goods are supplied on bank guarantees, making it viable for industry and commerce to cultivate and locate markets for their products. The risks are undertaken by the bank. When the risks have been set free by the banks, the industry can look forward to derive economies of the large size of the market.
d) Act as an engine of balanced regional development: Commercial banks help in proper allocation of funds among different regions of the economy. The banks operate primarily for profits. When the banks lend their funds for more productive uses, their profits will be maximized. Introduction of branch banking makes it possible to choose between different regions. A region with growth potential attracts more bank funds. But in recent years, the approach of banks towards regional growth has been undergoing a change. Banks help create infrastructure essential for economic development. Thus banks are engines of balanced regional development in the country.
e) Financing agriculture and allied activities: The commercial bank helps the farmers in extending credit for agricultural development. Farmers require credit for various purposes like making their produce, for the modernization and mechanization of their agriculture, for providing irrigation facilities and for developing land.The banks also extend their financial assistance in the areas of animal husbanding, dairy farming, sheep breeding, poultry farming and horticulture.
f) For improving the standard of living of the people: The standard of living of the people is estimated on the basis of the consumption pattern. The banks advance loans to consumers for the purchase of consumer durables and other immovable property, which will raise the standard of living of the people. Stimulating human capital formation, facilitating monetary policy formulation and developing entrepreneurs are some of the other roles played by commercial banks in the economic life of every nation.
2.Distinguish between central bank and commercial bank.

The central bank is the apex institution of the monetary and banking system of the country. A commercial bank is only a constituent unit of the banking system and a subordinate to the central bank.
While the central bank possesses the monopoly of note-issue,commercial banks do not have this right.
The central bank is not a profit making institution. Its aim is to promote the general economic policy of the government. But, the primary objective of commercial banks is to earn profit for their shareholders.
The central bank maintains the foreign exchange reserves of the country. The commercial banks only deal in foreign exchange under the directions of the central bank.
The central bank is an organ of the government and acts as its banker and the financial advisor, whereas commercial banks act as advisors and bankers to the general public only.

3. Give definitions of central bank by various monetary theorists.
Dr.L. Herber and L. Hart define the banker, “as one who in the ordinary course of business honours cheques drawn upon him by persons from and for whom he receives money on current accounts”. Chamber’s Twentieth century Dictionary defines a bank as an, “institution for the keeping, lending and exchanging etc. of money”.
According to Crowther, “The banker’s business is to take the debts of other people to offer his own in exchange, and thereby create money”. Prof. Kent defines a bank as, “an organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure”.
4.Explain various quantitative credit control methods of RBI.
a)Bank Rate (or) Discount Rate Policy: The rate of interest of every central bank is known as ‘Bank Rate’. It is otherwise known as ‘discount rate’. At this rate the central bank rediscounts bills of exchange and government securities held by the commercial banks.When the cash reserves of the commercial banks tend to fall below the legal minimum, the banks may obtain additional cash from the central bank either by rediscounting bills with the central bank or by borrowing from the central
bank against eligible securities. The central bank charges interest rate for this service. The central bank controls credit by making variations in the bank rate. A rise in the bank rate makes borrowing costly from the central bank.So commercial banks borrow less and in turn they raise their lending rates to customers. This discourages business activity. Thereby there is contraction of demand for goods and services and ultimately fall in the price level. Therefore bank rate is raised to control inflation. In the opposite case, lowering the bank rate offsets deflationary tendencies.
b) Open Market Operations:Direct buying and selling of securities, bills, bonds of government as well as private financial institutions by the central bank, on its own initiative,is called open market operations. In periods of inflationary situation, the central bank will sell in the money market first class bills. Buyers of this bill say commercial banks make payments to the central bank. It reduces the size of the cash reserves held by the commercial bank with the central bank. Some banks are forced to curtail lending. Thus, business activity based on bank loans and which is responsible for boom conditions are curtailed. In times of depression, the central bank will buy bills and securities from the commercial banks. The central bank will pay cash to the commercial banks for such purchases. Hence, the cash reserves of the commercial banks are increased. Thereby banks expand their loans resulting in the expansion of investment, employment, production and prices. Thus central bank through
its open market operations influences business activity and economic conditions of the country.
c) Variable Reserve Ratio: Every commercial bank is required by law to maintain a minimum percentage of its time and demand deposits with the central Bank. The excess money remains with the commercial bank over and above these minimum reserves is known as the excess reserves. Commercial banks create credit
only based on these excess reserves. Central bank may bring changes in reserve requirements. Consequently, it will affect the amount of reserves that commercial bank must maintain as deposits with the central bank as well as the amounts available for lending or investing. For instance, when the central bank fixes the reserve requirement as 10 percent, a commercial bank will have to maintain a cash reserve of Rs.100 for every deposit of Rs.1000 and hence it can lend only up to Rs.900. To check inflation the central bank may raise the cash reserve ratio from 10 percent to 15 percent. This will force the commercial banks to deposit additional 5 percent by reducing their amount available for lending. On the other hand, to check a deflation the central bank may reduce the reserve ratio from 10 percent to 7 percent. This will
raise the excess cash with the commercial banks; consequently credit will be expanded.

5.Explain the different types of loans and advances made by thecommercial banks.
Banks adopt several ways for granting loans and advances. These operations take different forms.
a) Cash credit: The bank sanctions loans to individuals or firms against some collateral security. The loan money is credited in the account of the borrower and he can withdraw the amount as and when it is required. The ceiling of the loan amount is determined by the bank on the basis of the stock value of the borrower which in turn becomes Banker’s possession. The borrower can withdraw the cash within or up to the credit limit. The bank charges interest for the amount withdrawn only.
b) Provision of overdraft facilities:The respectable and reliable customers enjoy these facilities. The customer can issue cheques and overdraw the money in times of need, even if there is no adequate balance in his account. The customer will pay the interest to the bank for the amount overdrawn.
c) Discounting bills of exchange: This operation is done through discounting of commercial papers, promissory notes and bills of exchange, usually for three months. The banks after deducting interest charges and collection charges from the face value of the bills, give the balance amount to the customer. When the exchange bill
matures, the banks collect the payment from the party.
6. What is moral suasion ?
Moral suasion implies persuasion and request made by the central bank to the commercial banks to follow the general monetary policy in the context of the current economic situation.
7.What is Open market operations?
Direct buying and selling of securities, bills, bonds of government as well as private financial institutions by the central bank, on its own initiative, is called open market operations.
8. What is Central Bank? Give example?
The central bank of the country is an autonomous institution, entrusted with powers of control and supervision. It controls the monetary and banking system of the country.The central bank of our country, known as Reserve Bank of India was set up in 1935. The central bank of England called Bank of England was established in 1694. It is known as the ‘mother of central banks’.
9. Describe the functions of commercial banks.

Accepting or attracting deposits: Commercial banks accept deposits by mobilizing the savings of the people. These deposits can be of three forms.

a) Savings deposits: It is a kind of safety vault for the people with idle cash. These deposits are kept under savings account. Deposits in this account earn interest at nominal rates and the banks are entitled to release deposits on demand by the deposit holder. In practice, the bank imposes a limit on the number and amount of withdrawals during a period. Cheque facilities are also given to the deposit holder.
b) Demand deposits: Demand deposits are kept under current account. The depositor can withdraw the money on demand. But, the account holder should specify the amount and the number of withdrawals. Banks do not pay any interest on these accounts. On the contrary, bank imposes service charges on maintaining these accounts.
c) Fixed deposits: These are also known as time deposits. The amount deposited cannot be withdrawn before the maturity period for which they have contracted. These deposits carry interest at higher rates varying with the length of the contract.

Advancing of loans: Banks adopt several ways for granting loans and advances. These operations take different forms.

a) Cash credit: The bank sanctions loans to individuals or firms against some collateral security. The loan money is credited in the account of the borrower and he can withdraw the amount as and when it is required. The ceiling of the loan amount is determined by the bank on the basis of the stock value of the borrower which in turn becomes Banker’s possession. The borrower can withdraw the cash within or up to the credit limit. The bank charges interest for the amount withdrawn only.
b) Provision of overdraft facilities :The respectable and reliable customers enjoy these facilities. The customer can issue cheques and overdraw the money in times of need, even if there is no adequate balance in his account. The customer will pay the interest to the bank for the amount overdrawn.
c) Discounting bills of exchange: This operation is done through discounting of commercial papers, promissory notes and bills of exchange, usually for three months. The banks after deducting interest charges and collection charges from the face value of the bills, give the balance amount to the customer. When the exchange bill matures, the banks collect the payment from the party.
3) Creation of money or credit: Every loan sanctioned by the banker creates a deposit. Because, when a bank sanctions loan to a customer, an account is opened in his name and the loan amount is credited into his account. The borrower withdraws money whenever the amount is required. The creation of such deposits leads to increase in the money stock of the economy and through its circulation creates new money.

Other functions: Some of the other important functions performed by these banks are as follows:

a) Transfer of funds: In the complexity of trade and commerce in the modern days, the transfer of funds from one place to another becomes difficult. Banks help in
eliminating this difficulty through the use of various credit instruments like cheques, bank drafts and pay orders, traveller cheques, etc. This process is called ‘clearing’ and it is efficiently done by bank operations.
b) Agency functions: Commercial banks are increasingly acting as financial agents for their clients. They make all sorts of payments on behalf of their clients like insurance premium, pension claims, dividend claims or capital demands etc. Likewise, they buy and sell gold, silver and securities on behalf of their clients.
c) General utility services: A commercial bank performs general utility services such as
i) providing safety lockers for the safer custody of valuables of the customers.
ii) Issuing of letter of credit to the customers.
iii) Under-writing loans to be raised by public bodies and corporations.
iv) Compiling statistics and information relating to trade, commerce and industry.
10. Examine the functions of central bank.

Regulator of currency:The issue of paper money is the most important function of a central bank. The central bank is the authority to issue currency for circulation,which is a legal tender money. The issue department of the central bank has the responsibility to issue notes and coins to the commercial banks. The central bank regulates the credit and currency according to the economic situation of the country. In the methods of note issue, the central bank is required to keep a certain amount or a fixed proportion of gold and foreign securities against the total notes issued. The Reserve Bank of India is required to keep Rs.115 crore in gold and Rs.85 crore in foreign securities, but there is no limit to the issue of notes.Having the monopoly of note issue, central bank gains advantages as

i) Ensuring uniformity of the notes issued and a proper control over the supply of money can be exercised.

ii) Bring stability in the monetary system and creates confidence among the public.
iii) Government is able to earn profits from printing currencies.

Banker, Agent and Adviser to the Government: The central bank of the country acts as the banker, fiscal agent and advisor to the government. As a banker, it keeps the deposits of the central and state governments and makes payments on behalf of governments. It buys and sells foreign currencies on behalf of the government. It keeps the stock of gold of the country. As a fiscal agent, the bank makes short-term loans to the government for a period not exceeding 90 days. It floats loans and advances to the State governments and local bodies. It manages the entire public debt on behalf of the government. As an adviser, the bank gives useful advice to the governments on important monetary and economic problems like devaluation, foreign exchange policy and budgetary policy.
Custodian of cash Reserves of commercial banks: Commercial banks are required to keep a certain percentage of cash reserves with the central bank. On the basis of these reserves, the central bank transfers funds from one bank to another to facilitate the clearing of cheques.
Custodian and Management of Foreign Exchange reserves: The central bank keeps and manages the foreign exchange reserves of the country. It fixes the exchange rate of the domestic currency in terms of foreign currencies. If there are any fluctuations in the foreign exchange rates, it may have to buy and sell foreign currencies in order to minimize the instability of exchange rates.
Lender of the last resort:By giving accommodation in the form of re-discounts and collateral advances to commercial banks, bill brokers and their financial institutions, the central bank acts as the lender of the last resort. The central bank lends to such institutions in order to help them when they are faced with difficult situations so as to save the financial structure of the country from collapse.
Clearing Function: The central bank acts as a ‘clearing house’ for other banks and mutual obligations are settled through the clearing system. Since it holds cash reserves of commercial banks, it is easier for the central bank to act as a ‘clearing house’.
Controller of credit: The most important function of the central bank is to control the credit creation power of commercial banks in order to control inflationary and deflationary pressures within the economy. For this purpose, the central bank adopts Quantitative methods and Qualitative (selective) methods. Quantitative methods aim at controlling the cost and quantity of credit by adopting

i)bank rate policy ii) open market operations iii) variations in reserve ratios of commercial banks. Qualitative methods control the use and direction of credit. It involves i) regulation of margin requirements ii) regulation of consumer credit, iii) rationing of credit, iv) direct action by the central bank, and v) moral suasion.