BANKING

1
BANKING
2
Terms to know
Definition of BANK
1
Kinds of BANK
2
Functions of central and commercial BANKS
3
Credit creation
4
3
Definition

• Bank is a financial institution. It deals in
  other peoples money.
• OR
• A financial institutions that accept deposits
  and make loans.
• Banks get surplus money from the people as
  deposits.
• They advance the same amount as loans.

4
Central bank and Commercial banks
Bank

• Central bank The central bank is the head, the
  leader and the supervisor of the banking and
  monetary system of a country.
• it controls total amount of currency.
• It acts as advisor to the govt.

• Commercial banks Commercial banks are the
  financial institutions, which perform general
  banking functions i.e.
• Receiving deposits
• Advance loans
• Create credit

5
Kinds of banks
Commercial bank
Central bank
kinds of banks
Industrial banks
Mortgage banks
Exchange banks
Agricultural banks
6
Functions of central bank

• A central bank performs the following functions
• Regulator of currency
• The central bank has the monopoly of note issue.
• Under this system the central bank keeps
  proportional
• reserves in the form of gold or foreign
  currencies.
• Banker, fiscal agent and advisor to the govt.
• As banker to the govt. it keeps the deposits and
  make payments on behalf of the govt.
• As a fiscal agent it makes short-term loans to
  the govt.
• The central bank also advises the govt. on such
  economic and money matters as inflation and
  deflation, deficit financing, balance of payments
  etc.

7
Functions of central bank (continued)

• Bankers bank
• The central bank acts as bankers bank. It
• keeps cash reserves of banks.
• On the bases of cash reserves the central bank
  can control the credit creation by commercial
  banks.
• Lender of last resort
• when the commercial banks are short of funds and
  are unable to get help from anywhere, the central
  bank provides them loans.
• Control of foreign exchange
• The whole business of foreign exchange control
  and financing of international trade is done by
  the central bank.

8
Functions of commercial banks

• Commercial banks perform the following functions
  
• Receiving deposits
• This is the primary function of commercial
  bank.
• Deposits are of three kinds
• Demand deposits or current account On demand
  deposits, the banks pay no interest. The deposits
  can be withdrawn at any time in full or in part.
• Saving deposits Some people put their money in
  saving deposit. On such deposits they earn some
  interest and also having the facility to withdraw
  the amount, subject to certain restrictions.
• Time deposits or Fixed deposits The amount under
  this deposit cannot be withdrawn before the
  expiry of the fixed period without due notice.
  The rate of interest on such deposits is high.

9
Functions of commercial banks (continued)

• Advance loans Bank receive money and lend it.
• Banks advance loans in three ways
• Running finance (RF) or Over draft facility (OD)
  
• In case of running finance (over draft facility),
  the customer is allowed to draw certain amount of
  money over and above his own deposited money.
• Interest is charged on the amount actually
  utilized.
• Cash credit or cash finance
• In case of cash credit, a definite amount is
  credited to the customers account.
• Interest is charged on the whole amount whether
  it is utilized in part or full.
• Against such loans, the borrower has to offer
  some assets as security..either a property or
  stock of goods.

10
Functions of commercial banks (continued)

• Discounting bills ( short term business loans)
• The businessmen can also get short-term loans
  through discounting bills. When a seller sells
  goods on credit, he writes a bill of exchange and
  gets it signed by the buyer. This bill (receipt)
  is kept by the seller till the promised date of
  payments.
• 3) Transfer of money
• The banks help in the transfer of funds from one
  place to another and from one person to another
  through cheques, drafts, pay order etc.
• Safe custody of valuables
• Banks provides the safe custody for valuables of
  customers such as jewellery (gold), documents
  etc.

11
CERDIT CREATION

• Creation of credit means that banks increase the
  supply of money through creation of new deposits
  in the name of borrowers.
• It become possible as follows
• Some people deposit cash with banks. Banks earn
  interest to lend it. The banks keep only a small
  percentage of cash as reserves to meet the demand
  of the depositors and advance the remaining part
  as loans.
• While lending money, the banks do not hand over
  cash to the borrowers. Simply an account is
  opened in the name of the borrower and the money
  is credited to this account. The customer can
  draw the money through cheques.
• Thus every loan makes a deposit.

12
Thank You !

• Prepared by
• M. Ihsan