A PROJECT OF

IPS ACADEMY

ECONOMICS AND BANKING FUNCTIONS

SESSION 2015- 2018

SUBJECT ECONOMICS

CLASS

PREPARED BY

GUIDANCE BY MS.PALLAVI MAM

BBA 2 SEC A

VINAYAK SHREYA AYUSH BHANU & HARSH

(GROUP A)10/11/2016 1

INDEXS.NO CONTENTS S.NO

1 WHAT IS ECONOMICS AND ITS EVOLUTION

2 BANKING DEFINATION OF BANKING AND BANK

3 COMMERCIAL BANKS-MEANING FEATURES AND FUNCTIONS

4 CREDIT CREATION

5 STOCK MARKET & INSURANCE

6 N.B.F.C MEANING CONCEPT &FUNCTIONS

7 SOURCES OF INFORMATION

8 THANKING10/11/2016 2

VINAYAK

BHANUPRATAP

AYUSH

VINAYAK

SHREYA

SHREYA

ECONOMICS AND ITS EVOLUTION

Economics took birth after the publication of "An inquiry into the Nature and cause of

wealth of Nation by Adam Smith year 1776. At early stage was known as Political

Economy'. But at the end of 19th century it was changed from Political Economy'

to'Economics.

Economics was originally introduced as a science of statecraft. It was concerned with the

collection of revenue for the state i.e., government.Adam Smith, generally known as the

father of Economics, defined Economics as'science

ECONOMICS-A SCIENCE THAT DEALS WITH THE ALLOCATION OR USE OF SCARE

RESOURCES FOR THE PURPOSE OF FULFILLING SOCIETY NEEDS AND WANTS

-BY ADDISON WELSEY

In old days, the subject matter of economics was divided into three basic activities

i.e, production, consumption and investment.

In this respect, classical economists like Adam Smith, Malthus, Ricardo etc.,

studied economic parameters from the viewpoint of the economy as a whole.

However, neo-classical economists like Marshall, Pigou etc, attached greater

significance to the study of Micro parameters and the trend continued till the

world's Great Depression of 1930. Therefore in order to eliminate this dispersion

Prof.Ragnar Frisch of Oslo's University Norway. divided the study of economics

into two branches in 1933. These is Microeconomics, and(b) acroeconomics.

After that, in 1936, with the publication of J.M.Keynes' book, The general theory

of employment interest and money study of two different branches once again

assumed greater significance.

MICRO AND MACRO

BANKING

“BANKING IS WHAT A BANK DOES”

According to CULBERSTON

“Commercial banks are the institutions that make short term

loans to business and in the process create money.”

DEFINATION

DEFINITION OF BANKING

Banking Regulation Act 1949 defines banking as, “ACCEPTING

FOR THE PURPOSE OF LENDING AND INVESTMENT, OF

DEPOSITS OF MONEY FROM THE PUBLIC, REPAYABLE ON

DEMAND, ORDER OR OTHERWISE AND WITHDRAWABLE BY

CHEQUE,DRAFT,ORDER OR OTHERWISE”.

DEFINITION OF A BANK

The Banking Companies Act of India defines a bank as

“A Bank is a financial institution which accepts money

from the public for the purpose of lending or investment

repayable on demand or otherwise withdrawable by

cheques, drafts or order or otherwise.”

FUNCTIONS OF

COMMERCIAL

BANKS

PRIMARY

FUNCTIONS

SECONDARY

FUNCTIONS

ACCEPTING

DEPOSITSGRANTING LOANS

AND ADVANCES

CURRENT

ACCOUNT

SAVINGS

ACCOUNT

FIXED

DEPOSIT

ACCOUNT

LOANS ADVANCES

CASH

CREDIT OVERDRAFTDISCOUNTING

OF BILLS

SPECIAL FINANCIAL

SERVICES

AGENCY

FUNCTIONS

FUNCTIONS OF COMMERCIAL BANKS

(A)The primary functions of the bank includes-

The most significant and traditional function of commercial bank is accepting deposits

of public under saving account, current account and fixed deposits. These are

explained below:

1. Current account deposits.

*These deposits are payable on demand and are termed as demand deposits.

*These can be withdrawn any time.

*No interest is paid on such deposits but eque facility is provide term deposits.

2.Fixed deposit account-

*These are deposits for a fixed time period which can be days or few years.

*They do not enjoy cheque facility and are not few a payable on demand.

*Such deposits are withdrawable only after certain period of time.

*The interest rate on such deposits is generally high

3.saving account deposits. Such deposits are maintained by households for the purpose

of saving. They possess the ent account and fixed deposits. They are payable on demand

and the facility is provided under certain restrictions

(2)##Granting loans and advances-

The second important function of commercial banks is advancing loans to the public to fulfil their needs of money. Loan may be granted in the form of cash credit, demand loans and short term loans

1.loans-

* A an is granted for a specifictime time period.Generally, commercial banks providshort-term loans. But term loans, i.e. loans for more than year may also be granted.

•loan is normally repaid in installments However, it may also be repaid in lump sum.

2.Advances-

*An advance is a credit facility provided by the bank to its customers.

*It differs from loan in the sense that loans may be granted for longer period but advances are normally granted for a short period of time the purpose of granting advances is to meet day-to-day requirements of the business.

*Rate of interest always varies from Bank to bank.

##Types of advances.##

1. Cash credit. Under this scheme an eligible borrower is first sanctioned a credit limit

upto which he may borrow from Bank. The actual withdrawal depends upon the

withdrawing power of the borrower.

2.Overdraft. A customer who has current account with the bank is allowed to withdraw

more than the amount of credit Balance in his account.

3. Discounting bills. Banks also provide the facility of discounting bills.

(B)Secondary Functions.

It includes

*special financial services and

Special Financial Services include: 1.Issuing letters of credit, travelers cheque, etc.

2.Providing customers with facilities of foreign exchange dealings.

3.Transferring money from one account to another and from one branch to another

branch of the bank through ch egue, pay order or demand draft.

4.Providing reports on the credit worthiness of customers.

*Agency functions

Agency Functions: Banks act as an agent of their customers in various ways as

follows:

1.Collection of cheques, drafts, bills on behalf of customers.

2.Collection of dividends interest warrants of customers.

3.Purchase or sale of securities on the instruction of customers.

4.managing the money for its customers for making payment for purchase of

goods, machinery, etc.

5.collection of pension of government employees

TOP RANKING COMMERCIAL BANKS

IN INDIA

1. STATE BANK OF INDIA

2. ICICI Bank Limited

3. Punjab National Bank

4. Canara Bank

5. Bank of Baroda

6. Bank of India

7. Union Bank of India

8. Industrial Development Bank of India Limited

9. Central Bank of India

10. HDFC Bank Limited

11. UCO Bank

12. Syndicate Bank

13. Indian Overseas Bank

14. Oriental Bank of Commerce

15. Allahabad Bank

CREDIT CREATION

Money deposited by the people in bank is given to another people the form of loan to satisfy their

wants of money. People, who take from banks do not spend whole money they also deposit excess

money in their bank account. The process continues. In this way money multiplies and banks make

a system of credit creation.

MEANING

In short, credit creation refers to that power of the banks which enables them to expand

theirsecondary deposits through loans, advances an investments more than primary deposits

PROCESS OF CREDIT CREATION

Banks often create credit on the basis their primary deposits. The process of cred creation involves:

the Bank

the Depositor

the Borrower

It can be illustrated with the help of an Example

1.Suppose initally a person deposits 100 in a bank.

2.It is primary deposit for the bank Bank knows all depositors do not withdraw their money @ one

time.

3.Suppose, the bank keeps 20% of total de in cash and advances the rest he amount as loans

4.But banks cannot use the whole of deposit for this purpose these compulsory for the banks to keep a

certain minimum fraction The deposits The fraction is called the Legal Reserve Ratio LRR is fixed by

the Central bank. It has two components. of the to be kept with the A part Reserve Ratio. The other

part is bank and this part the Statutory Liquidity kept by the banks themselves and is called Ratio.

LET US NOW EXPLAIN THE PROCESS

1.Suppose the initial deposits in banks is 100rs and the LRR is 20 per cent. Further

suppose that banks keep only the minimum required R 20 as cash reserve, no more no

less,Banks are now free to lend the remainder Rs 80.

2.Bank does not give loans in cash, but opens a current account in favour of a person

and credits this amount 80 to it.

3.the money spent by the borrowers comes back into the banks in the deposit accounta

of those who have received this payment.This increases demand deposi nks by 80. It

is 80 per cent of the initial deposit.In this sense the banks are responsible for money

creation. With this round, increase in total deposit are now Rs 180=100+80.

5.The total deposits now increase to R 244=100+80+64). The process does not end here.

6.The deposit creation continues in the above manner. The deposits go on increasing round after round but each time only 80% per cent of the last deposits.

Thus the money multiples and creation of credit is done by the banks.

4.When banks receive new deposits of Rs 80, the banks keep 20% as cash reserves and use the remaining Rs 64 for giving loans. The borrowers use these loans for making payments. The money comes back into the account of those who have received the payments. Bank deposits again rise by smaller amount of Rs 64. It is 80% per cent of the last deposit creation

S.NO ROUND DEPOSITS

(PRIMARY DEP)

LOANS

(SECONDARY DEP)

CASH RESERVES

(LRR=0.2)

1 INITIAL 100 80 20

2 ROUND 1 80 64 16

3 ROUND 2 64 51.20 12.80

4 - - - -

5 TOTAL 500 400 100

DEPOSITS CREATION BY COMMERCIAL BANKS

FINANCIAL MARKET

CAPITAL MARKET MONEY MARKET

PRIMARY MARKET SECONDARY MARKET

(STOCK EXCHANGE)

1) INITIAL PUBLIC

OFFERS (IPOs)

2) RIGHT ISSUES

3) PREFERENTIAL

ISSUES

22 REGIONAL

STOCK EXCHANGES2 NATIONAL LEVEL

STOCK EXCHANGES

NSEI OTCEI

1) TREASURY BILLS

2) COMMERCIAL PAPER

3) TRADE BILS

4) CERTIFICATE OF

DEPOSITS (CODs)

5) CALL MONEY

Financial market is a link between surplus and deficit units or in other words financial market

brings together lenders and borrowers. There are two segments of financial market

1.Capital Market,

2.money Market

Capital Market. It is the market for long and medium term funds. It refers to the

organisations/institutions which provide funds for more than one year time period.The common

instruments of capital market are:

(A) Debentures

(b) Equity shares Debentures

(C) preference shares

(d) other innovative securities.

Stock market

There are two components of capital market:

(i)Primary market-

It is also known as new issue market as it is the market for new long term capital securities issued

by the company.The securities in primary market in ways:

(a) Public issue through prospectus

(b) Rights issue for existing shareholders

(c) Preferential issue

(D) offer for sale

(e) Private placement

(F)e-ipo.

(ii) Secondary Market.

It is more commonly known as second hand security market or stock exchange market. In this

market securities are not directly issued by company but by existing investors. This market

provides liquidity to primary market and hence indirectly in capital formation.

Money Market.

It is the market of short term funds that means funds for a period of to one year only. It is

considered as a market for providing working capital.

The important instruments of money market are:

(A)Call money

(b) Treasury bills

(C)Commercial papers

(D)Trade bills

(E)Certificate of deposit.

The financial institutions which provide the various banking facilities, but are not termed as

banks', because they do not hold the banking license are known as Non-Banking Financial

Institutions(NBFCs)

The difference between banks and NBFCs are as follows:

1.NBFC cannot accept demand deposits.

2.cannot provide cheque facility to its customers.

3.Deposit insurance facility is not available for NBFC depositors unlike in case of banks.

Functions of NBFCs...

1.The NBFcs provide loans, credit facilities, support investments in property fund for private

education.

2. They help in wealth management and re-tirement planning.

3.They have to borrow cash from banks and financial institutions.

4.They act as financial intermediary.

NBFCs

BIBILOGRAPHY/ SOURCES OF INFORMATION

1) WIKIPEDIA.COM THE FREE ENCYCLOPEDIA.

2) GOOGLE.COM.

3) SCRIBD.COM.

4) BOOKS.(JK BHUTANI,S.A SIDDIQUI Poonam gandhi ETC.)

5) STUDY MATERIALS

6) OTHERS

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