UNIT-16

Money and
Banking
 Money

• Money is a medium of exchange for goods or

services within an economy that is widely
used and accepted by all.
 Forms of money
• Coins
• Notes
• Bank accounts
 Functions of money
• Medium of exchange
• Store of value
• A unit of account/ measure of value
• Standard of deferred payments
 Features/ Characteristics
• Legal tender
• Intrinsic value not needed
• Generally acceptable
• Limited in supply
• Others
– Durable
– Portable
– Divisible
– Homogeneous
– Recognisable
BANKS
 BANKS
A bank is a financial institution that accepts
deposit and channels the money into many
lending activities and carryout a range of other
financial activities.
 BANKING
 Banking is a major industry in a number of
country.
 It helps people to borrow and lend and
carry out a range of other financial activities.
It enables more efficient use of resources.
 Encourages the growth of output of
economics.
 COMMERCIAL BANKS
Private sector banks which aim to make a
profit by providing a range of banking
services.
Commercial banks are also called :
Joint stock banks
Retail banks
High street banks
THE MAIN FUCTIONS OF COMMERCIAL
BANKS

To accept deposit
To lend
To enable customer
to make payments.
THE MAIN FUCTIONS OF COMMERCIAL
BANKS
To accept deposit : deposit can be made
into two types of bank account.
Current account or demand account.
An account at a bank or building society from
which money may be withdrawn without notice,
typically an active account catering for frequent
deposits and withdrawals by cheque.
• Deposit or time account A savings account is
an interest-bearing deposit account held at a
bank or other financial institution that
provides a modest interest rate. Financial
institutions that offer savings accounts may
limit the number of withdrawals from an
account each month.
Difference between current and deposit
account
Current account Deposit account

Money can be deposit and A period of notice has to be

withdrawn anytime given before money can be
withdrawn

No interest is paid on money Interest is paid on any amount

held in such account.

It enables easy and immediate Customer use deposit account as

access to money. a way of saving
 THE MAIN FUCTIONS OF
COMMERCIAL BANKS
To lend: there are two ways of
borrowing–
Overdraft
Loan
 Difference between Overdraft and loan.
Overdraft loan
Customer must have current account. Borrower need not have a current
customer is allowed to overdraw his account.
account up to certain limit for an
agreed period.

Less formalities are observed as The borrower has to go through the

borrower need not fill in forms formal procedure of applying for a
whenever he wants credit. loan

High interest is charged. relatively Interest is likely lower than overdraft.

expensive way of borrowings

Interest charged on actual amount Interest charged on whole amount for

and the no of days the account is full period of time.
overdrawn.

No security or collateral is needed as Borrowers may be asked for collateral

borrowers are already customer. as a form of security.
THE MAIN FUCTIONS OF COMMERCIAL BANKS.

To enable customer to make payments

Acting as an agents for payments and providing
money transmission services. These include:
Cheques
Standing order
Direct debits
Debit/credit cards
Online banking
 Other functions
• Exchange foreign currencies
• Locker facilities
• Provide advice and help with a number of
financial matters
• House loan, education loans etc.
 How does a Commercial banks as financial
intermediaries make a profit?

Savers and depositors Lend money to

save and deposit Bank act as household and
money intermediaries business
Central bank
 Central bank
A central bank has authority over all of the commercial
banks that operate in its country, and is owned and operated
by the government.

The most well-known and influential central bank in the

world is the Federal Reserve Bank of the USA (often
abbreviated Fed). Other well known central banks are the
European Central Bank and the Bank of England.
The central bank of Bangladesh is Bangladesh Bank
These banks provide services to commercial banks and the
government.
The Functions of central bank
Acts as a banker to the government.
Operates as a banker to the
commercial banks.
Acts as a lender of last resort.
Manages the national debt.
Hold the country’s reserves of foreign
currency and gold.
 The Functions of central bank
Issues bank notes.
Implements the government’s monetary
policy.
Controls the banking system
Represents the government
 Differences between commercial banks and central bank
Central bank Commercial banks
The bank which looks after the monetary The establishment, which provides banking
system of the country is known as Central services to the public is known as
Bank. Commercial Bank.
It is a banker to the banks and the It is the banker to the citizens of the nation.
government of the country.

Ownership is public or govt. Public or Private

Objective is Public welfare and economic Objective is Earning Profits

development.
Right to print and issue currency notes and It performs agency functions like
control the supply of money. collections of bills of exchange and
promissory notes, trading of shares and
debentures, payment to third parties
on standing instructions of the customer,
etc.

Represent the government in international Represent customer in different financial

areas. transactions.
Thank you
 How Central Banks Control the Money Supply

Reserve requirements: As a rule, banks are mandated to keep a certain

percentage of all deposits in the bank. This is known as the "reserve requirement."
Interest rate: In most cases, a central bank cannot directly set interest rates for
loans such as mortgages, auto loans, or personal loans. When banks get to borrow
from the central bank at a lower rate, they pass these savings on by reducing the
cost of loans to its customers. Lower interest rates tend to increase borrowing and
this means the quantity of money in circulation increases.

Open market operations: Open market operations are a way of affecting the
money supply by buying or selling securities -- usually government securities.
When a central bank is looking to increase the quantity of money in circulation, it
purchases government securities from commercial banks and institutions. This
frees up bank assets—they now have more cash to loan.