UNIT -1

Money Banking and Trade

Money is defined as the modern medium of exchange and the standard unit in which prices
and debts are expressed".

Functions of Money
Medium of exchange: Money's most important function is as a medium
of exchange to facilitate transactions. Without money, all transactions
would have to be conducted by barter, which involves direct exchange of
one good or service for another. The difficulty with a barter system is that
in order to obtain a particular good or service from a supplier, one has to
possess a good or service of equal value, which the supplier also desires
Store of value: In order to be a medium of exchange, money must hold
its value over time; that is, it must be a store of value. If money could not
be stored for some period of time and still remain valuable in exchange, it
would not solve the double coincidence of wants problem and therefore
would not be adopted as a medium of exchange.
Unit of account: Money also functions as a unit of account, providing
a common measure of the value of goods and services being exchanged.
Knowing the value or price of a good, in terms of money, enables both the
supplier and the purchaser of the good to make decisions about how much
of the good to supply and how much of the good to purchase.

Characteristics of Money
1. General Acceptability: Everybody must be prepared to accept.
2. Durability: Money in circulation must be durable.
3. Homogeneity: This means that every money note or coin has the
same buying power.
4. Stability: Money should be stable in value because it has to
serve as a measure of value.
5. Portability: Money should be easy to carry in both large and
small amounts and should be easily carried and transferred from
one place to another.

Function of commercial Banks

The functions of a commercial banks are divided into two categories:
i) Primary functions, and

ii) Secondary functions including agency functions.

i) Primary functions
The primary functions of a commercial bank include:
a) accepting deposits.
b) granting loans and advances.
a) Accepting deposits
The most important activity of a commercial bank is to mobilise
deposits from the public. People who have surplus income and
savings find it convenient to deposit the amounts with banks.
Depending upon the nature of deposits, funds deposited with
bank also earn interest. Thus, deposits with the bank grow along
with the interest earned. If the rate of interest is higher, public
are motivated to deposit more funds with the bank. There is also
safety of funds deposited with the bank.
b) Grant of loans and advances
The second important function of a commercial bank is to grant
loans and advances. Such loans and advances are given to
members of the public and to the business community at a higher
rate of interest than allowed by banks on various deposit accounts.
The rate of interest charged on loans and advances varies
depending upon the purpose, period and the mode of repayment.
The difference between the rate of interest allowed on deposits
and the rate charged on the Loans is the main source of a banks
income.
ii) Secondary functions
Besides the primary functions of accepting deposits and lending money,
banks perform a number of other functions which are called secondary
functions. These are as follows a) Issuing letters of credit, travellers cheques, circular notes etc.
b) Undertaking safe custody of valuables, important documents, and
securities by providing safe deposit vaults or lockers;
c) Providing customers with facilities of foreign exchange.
d) Transferring money from one place to another; and from one
branch to another branch of the bank.

e) Standing guarantee on behalf of its customers, for making

payments for purchase of goods, machinery, vehicles etc.
f) Collecting and supplying business information;
g) Issuing demand drafts and pay orders; and,
h) Providing reports on the credit worthiness of customers.

Banking System in India

Reserve Bank of India
The Reserve Bank of India (RBI) is India's central banking institution, which controls
the monetary policy of the Indian rupee. It was established on 1 April 1935 during the British
Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share
capital was divided into shares of 100 each fully paid, which was entirely owned by private
shareholders in the beginning. Following India's independence in 1947, the RBI was
nationalized in the year 1949.
The RBI plays an important part in the development strategy of the Government of India. It is
a member bank of the Asian Clearing Union. The general superintendence and direction of
the RBI is entrusted with the 21-member-strong Central Board of Directorsthe Governor,
four Deputy Governors, two Finance Ministry representative, ten government-nominated
directors to represent important elements from India's economy, and four directors to
represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of
these local boards consists of five members who represent regional interests, as well as the
interests of co-operative and indigenous banks.
The bank is also active in promoting financial inclusion policy and is a leading member of
the Alliance for Financial Inclusion (AFI).

UNIT-2
Management Principles