Revision: Money and Banking: Basic Concepts >> Banking : Commercial Banks and Central Bank Economic Applications (English Medium) ICSE Class 10 CISCE

• “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.”

The Credit multiplier is equal to `1/"CRR"` and depicts the number of times the credit is multiplied, with a given amount of initial deposit.

• “Credit may be defined as the right to receive payment or the obligation to make payment on demand or at some future time on account of an immediate transfer of goods.” — Prof. R.P. Kant
• “Commercial banks are the manufacturers of money.” — Prof. Sayers

• "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

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.

Moral persuasion is a method of credit control employed by the Central Bank. It is a method of request and advice to the commercial banks by the Central Bank. 

Bank rate is the rate at which the central bank provides credit to commercial banks.

The ‘bank rate’ or ‘discount rate’ refers to the interest rate at which the central bank provides loans and advances to commercial banks or rediscounts their approved bills of exchange and government securities. By adjusting this rate, the central bank regulates the amount of credit available in the economy.

• Open market operations refer to the buying and selling of government securities. These securities can be bought or sold to the public or to the commercial banks in an open market.
• Open market operations are used by the central bank to affect the money supply in the economy.
• The sale of securities by the RBI drains the extra cash from the economy, thereby limiting the money supply, whereas the purchase of securities by the RBI pumps additional money into the economy, thereby stimulating the money supply.

Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits that a commercial bank has to maintain in the form of specified liquid assets with themselves.

Cash Reserve Ratio (CRR) is a certain minimum percentage of deposits that commercial bank and has to keep as reserves with the central bank.

A margin is the difference between the loan amount and the market value of the security offered by the borrower against the loan. The central Bank fixes it.

The goal of the qualitative approach to credit control is to manage and oversee the distribution of credit among different credit users. They are made to control the flow of credit for particular purposes. Moral persuasion and credit rationing are two instances of qualitative credit control techniques.

• Dr. M. H. de Kock: “Central bank is one which constitutes the apex of the monetary and banking structure of the country.”
• Prof. W. A. Shaw: “Central bank is a bank which controls credit.”

\[\text{Increase in Deposits}=\frac{1}{RR}\times\Delta D\]

• Acceptance of Deposits: Banks accept current, savings, and fixed deposits from the public to mobilise savings.
• Advancing Loans and Credit: Banks give loans through cash credit, overdrafts, term loans, and discounting of bills.
• Facilitating Payments: Payments are made easily through cheques, drafts, and electronic transfers.
• Transfer of Funds: Banks help in quick and safe remittance of money from one place to another.
• Agency & Utility Services: Banks collect payments, pay taxes and insurance, deal in shares, provide lockers, cards, and advisory services.
• Credit Creation: Banks create credit by lending more than their actual cash deposits.