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Revision: Understanding Finance >> Banking and Bank Transactions Commercial Applications (English Medium) ICSE Class 10 CISCE

Definitions [7]

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

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.

Definition : Chequebook

A chequebook contains several blank cheques, which can be used when payments or money transfers are needed. Banks give a chequebook to their account holders if they keep a certain minimum balance.

Definition : Bouncing of Cheque

A cheque is said to be bounced or dishonoured when the bank refuses to pay the amount written on the cheque.

Definition : Cheque

A cheque is a written order from an account holder to their bank to pay a specified amount to another person or the bearer (anyone physically holding or presenting it). It is mostly valid for 3 months from the date of issue.

Definition: Endorsement of Cheque

Endorsement involves writing the name of the new payee (the person who will get the cheque) and signing it on the back of the cheque.

This allows the original payee to transfer the right to receive the payment to another party.

Definition : Cheque Truncation System (CTS)

The Cheque Truncation System (CTS) is a modern method used in India for faster and safer cheque clearing. Instead of physically moving the paper cheque from one bank to another, the bank scans the cheque, and an electronic image is sent for clearing and payment.

Key Points

Key Points: Types of Bank

Central Bank: Issues currency, controls credit, and acts as banker to the government and other banks (e.g. RBI).
Commercial Banks: Accept deposits from the public and give short-term loans for trade and business.
Industrial Banks: Provide long-term loans to industries for machines, buildings, and development.
Agricultural & Rural Banks: Give short, medium, and long-term loans to farmers and rural people at low interest.
Co-operative & Savings Banks: Encourage saving habits and provide credit to small farmers, traders, and societies.
International & EXIM Banks: Provide finance for international trade and development projects (e.g. World Bank, EXIM Bank).

Key Points: Central Bank as a Controller of Credit

The Central Bank controls currency and credit to maintain monetary stability.
It regulates money supply through quantitative and qualitative credit control measures.
Credit control helps in achieving price stability, economic stability, and exchange rate stability.
The ultimate aim is high employment and economic growth (in India, done by the RBI).

Key Points: Banking > Functions of Commercial Bank

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.