Revision: Banking Economics HSC Arts Class 12 Tamil Nadu Board of Secondary Education

Definitions [4]

Definitions: Commercial Banks

“A bank collects money from those who have it to spare or who are saving it out of their incomes and it lends this money to those who require it.” — Crowther
“Bank means accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft or otherwise.” — According to Indian Companies Act, 1949
Banking Regulation Act of 1949: “Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, demand draft, order or otherwise.”
Prof. Cairncross: “A bank is a financial intermediary, a dealer in loans and debts.”

Define the following concept.

Open Market Operation

Open market operations refer to the sale and purchase of government and other approved securities by central bank in the money and capital markets.

Open Market Operations (OMOs) are employed by Central Banks, such as the RBI, to control the money supply. Buying and selling government bonds on the open market changes liquidity, interest rates, and the economy. Central Bank purchases of securities increase market liquidity and lower interest rates. Selling assets reduces market liquidity and raises interest rates.

Definitions: Central Bank

"A bank which constitutes the apex of the monetary and banking structure of the country." — De Kock
"A central bank is "The bank in any country is one which has been entrusted the duty of regulating the volume of currency and credit in that country." — Bank for International Settlements

Definitions: Monetary Policy

“The management of the expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective such as full employment.” — R.P. Kent
“Monetary Policy consists of the steps taken or efforts made to reduce to a minimum the disadvantages that flow from the existence and operation of the monetary resources in the economy to attain certain specific objectives….” — Prof. Crowther
“Monetary policy involves the influence on the level and composition of aggregate demand by the manipulation of interest rates and the availability of credit.” — D.C. Aston
“By monetary policy, we mean any conscious action undertaken by the monetary authorities to change the quantity, availability and cost of money.” — G.K. Show

Key Points

Key Points: Commercial Banks

Commercial banks are profit-seeking intermediaries connecting savers and borrowers.
Their primary functions are accepting deposits and granting loans.
India has 89 scheduled commercial banks divided into PSBs, RRBs, Private Banks, and Foreign Banks.
Nationalisation in 1969 and 1980 expanded banking access to rural and priority sectors.
SBI is India's largest bank — 25% market share, 45 crore customers, top 5 globally.
RRBs serve rural India at lower interest rates and are the backbone of rural credit.
Private and foreign banks drive technology, innovation, and competition in banking.
Commercial banks are regulated by the Reserve Bank of India (RBI) and governed by the Banking Regulation Act, 1949.

Key Points: Central Bank

The central bank is the highest authority in the banking system. It controls, regulates and supervises all banks and manages the country’s monetary system.
It formulates and implements monetary policy to control inflation, deflation, and overall credit in the economy.
It acts as a banker, adviser and agent to the government, and also works as a “banker’s bank” by guiding and supporting commercial banks.
The central bank has the sole authority to issue currency (except small coins/notes in some cases), ensuring a uniform and reliable money supply.
It supports economic growth by promoting banking, developing financial institutions, managing foreign exchange, and helping priority sectors.

Key Points: Capital Market in India

Capital market is a market for long‑term funds (more than one year), both equity and debt.
It supplies finance for agriculture, trade and industry, helping investment and economic growth.
Main suppliers of long‑term funds are individual savers, companies, banks, insurance firms and special financial institutions.

Key Points: Demonetisation