money and banking ajahar husai NDIM

MONEY AND
BANKING
10/4/2013MONEY & BANKING
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AJAHAR 187
AMRITA 219
JAYATI 214
ABHISHEK 182
SUSHEEL 178
HITESH 213
• PRESENTED BY -
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CONTENTS
• DEFINITION OF MONEY
• FUNCTION OF MONEY
• KIND OF MONEY
• MEASUREMENT OF MONEY
• USE OF MONEY
• CHARACTERISTICS OF MONEY
• KEY TERMS OF BANKING
• HISTORY OF BANK
• ROLE OF BANK
• TYPES OF BANK
• BANKING STRUCTURE IN INDIA
• IMPORTANTS BANKS IN INDIA
• CURRENT ASSETS
• CURRENT SHARE HOLDER EQUITY
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“Money is whatever is generally
accepted in exchange for goods and
services — accepted not as an object
to be consumed but as an object that
represents a temporary abode of
purchasing power to be used for
buying still other goods and services.”
— Milton Friedman (1992)
DEFINITION OF MONEY
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• anything commonly accepted
in exchange for goods/services
• many objects throughout history
5

examples
• livestock
• metals
• cigarettes
• grain
• shells
6

money, income, & wealth
• money
– what is accepted as payment
• income
– earnings during time period (year)
• wealth
– accumulated assets at pt. in time
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examples
• I own $2 million in diamonds.
– I am wealthy
– I have no money
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• I win $25 million in lottery
• I quit my job
– I am wealthy
– I have a lot of money
– my income is zero
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• software engineer
• earnings $100,000/yr
– high income
– no wealth
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How does money serve the needs of our
society?
• Money provides means for comparing values of
goods and services.
• Money also serves as a store of value.
• Without money, we wouldn’t be able to get the
things that we need and want.
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• A medium of exchange: an asset used to buy and sell goods
and services
• A store of value: an asset that allows people to transfer
purchasing power from one period to another
• A unit of account: a unit of measurement used by people to
post prices and keep track of revenues and costs
• Money as a standard of deferred payment
FUNCTION OF MONEY
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Kinds of Money
Metallic coins
1. Full bodied money coins
2. Token coins
Paper money
1. Representative paper money
2. Convertible paper money
3. Inconvertible paper money
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• commodity money:
It has its own value as a good
-- gold & silver coins
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• Fiat money:
No value other than fact that it’s
accepted in exchange for goods and
services
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• United States money today is fiat money,
which has value because a government has
decreed that it is an acceptable means to pay
debts.
– Citizens have confidence that the money will be
accepted.
– Because the Federal Reserve controls the supply, it
remains in limited supply, which makes it
valuable.
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U.S. money is fiat money!
• NOT backed by gold since 1934
• coins do not contain silver
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Debit or Credit cards?
• NOT money
• payment mechanisms that access money
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Measurement of Money
R.B.I. presented four measures in 1977. These are
defined below in decreasing order of their
liquidity.
The following measures of money supply are used
by the R.B.I.
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M1
= currency in circulation
+ demand deposits
+ checkable deposits
+ traveler’s checks
$1.4 trillion
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M2
= M1
+ savings deposits
+ small time deposits
+ retail money market deposits
$7.3 trillion
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M3
= currency with the public
+ Demand Deposits with banks
+ time Deposits with banks
+ other Deposits with the R.B.I.
22

Components of M1
1%
23%
28%
48%
currency
traveler's checks
demand deposits
other checkable
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Components of M2
M1
22%
small CDs
20%savings
39%
money
market
19%
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Money Growth and Inflation
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Three Uses of Money
• Money is anything that serves as a:
– Medium of exchange
– A unit of account
– A store of value
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The Characteristics of Money
• Durability
• Portability
• Divisibility
• Uniformity
• Limited supply
• Acceptability
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Durability and Portability
• Durability
• Money must be able to withstand
the physical wear and tear that
comes with being used over and
over again.
• Portability
• Money must be easily carried by
people. Paper money and coins
work because they are small and
light.
28

Divisibility and Uniformity
• Divisibility
• Money must be easily divided into smaller
denominations.
• Uniformity
• People must be able to count and measure money
accurately.
29

What Makes Money Valuable?
• There are actually several possible sources of
money’s value depending on whether it is commodity
money, representative money, or fiat money.
30

BANKING
HISTORY
31

The First Bank of the United States
• Federalists won the first debate and in 1791,
Congress established the Bank of the United States.
Yet, disagreements over the Bank continued.
– Antifederalists argued that the Bank was unconstitutional
and that it did not benefit ordinary people, only the wealthy.
• The Bank functioned until 1811, when its charter ran
out.
– State banks then took over for the Bank of the United
States, which created a great deal of chaos and confusion.
32

The Second Bank of the United States
• To eliminate the chaos, Congress charted the Second
Bank of the United States in 1816.
• Stability was restored but many were still wary of the
Bank’s powers.
– In 1832, when
Congress tried to
renew the Bank’s
charter, President
Andrew Jackson
vetoed the renewal.
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DEFINATION
• bank: an institution for receiving, keeping,
and lending money
• national bank: a bank chartered by the federal
government
• bank run: a widespread panic in which many
people try to redeem their paper money at the
same time
• greenback: a paper currency issued during the
Civil War
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• gold standard: a monetary system in which
paper money and coins had the value of certain
amounts of gold
• central bank: a bank that can lend to other
banks in times of need
• member bank: a bank that belongs to the
Federal Reserve System
• foreclosure: the seizure of property from
lenders who are unable to pay back their loans
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ROLE OF BANKS
 Payment system
 Pay deposits on demand
 Payment through cheques
 Facilitate movement of money
 Circulatory system of the economy
 Financial services provider
 Products of mutual funds &insurance companies
 Collection of utility bills
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• The banking industry includes:
• commercial banks,
• savings and loans, and,
• credit unions.
The Business of Banking
• Banks are profit-seeking institutions:
• Banks accept deposits and use part of
them to extend loans and make investments.
Income from these activities is their major
source of revenue.
37

How Banks Create Money
by Extending Loans
• The lower the percentage of the reserve
requirement, the greater the potential expansion in
the money supply resulting
from the creation of new reserves.
• The fractional reserve requirement places
a ceiling on potential money creation from new
reserves.
• The actual deposit multiplier will be less than the
potential because:
• some persons will hold currency rather than
bank deposits, and,
• some banks may not use all their excess
reserves to extend loans.
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TYPES OF BANKS
Commercial bank
Government bank
Private bank
Saving bank
Cooperative bank
Investment bank
Specialized bank
Retail bank
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COMMERCIAL BANK
 It helps to mobilize the saving of the community
 To make them available to the entrepreneurs
 To ensure safety with liquidity
 Bank assures all the funds can be drawn back in case of
need
40

Functions of
Commercial Banking
• Banks provide services and pay interest to attract
checking, savings, and time deposits (liabilities).
• Most of these deposits are invested and loaned out,
providing interest income for the bank.
• Banks hold a portion of their assets as reserves (either
as cash
or deposits with the Fed) to meet their daily obligations
toward their depositors.
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Commercial bank in india
 1950- 645 banks and 4,800 branch office
 1969- 14 major commercial bank is nationalized
 1993- 2 more bank merged
 At present- 19 nationalized bank in india
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DRAWBACK OF COMMERCIAL BANK
 Growth is less
 Regional imbalance
 Quality service is poor
 No proper experts to improve public sectors banks
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Government bank
government has a major stake
 usually need to emphasize on social objectives
than on profitability.
 Central bank , RBI
Private bank
 owned, managed and controlled by private
promoters
free to operate as per market forces .
City union , bank of rajasthan 10/4/2013MONEY & BANKING
44

Financial institution that assists individuals, corporations
and governments
example - M&T bank
Investment banking
Governed by the provisions of State Cooperative
Societies Act
i.e., agricultural financing bank in India.
Cooperative bank
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CENTRAL BANK
 Other banks are largely profit seeking institutions ,the
Central bank is not
 It acts as the organ of the state
 Other bank have largely public dealing ,the central bank’s
dealing are with governments, central & state banks &
other financial institutions
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BANKING STRUCTURE IN INDIA
 The state bank of india & its associated banks
 Others nationalized banks
 Regional rural banks
 Private sectors commercial banks
 Foreign banks
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FUNCTION OF RBI
 Issue of currency
 Bankers to the government
 Bankers bank
 Custodian of foreign exchange reserve
 Controller of credit
 Promotional function
 Collection & publication of data
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State BANKS assets
Switzerland USB 1533 billion
United state Citi group 1484 Billion
Japan UFJ 1296 Billion
United kingdom HSBC 1277 Billion
France Credit Agricola
group
1243 Billion
Current assets of top 5 bank in world
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Country Company Share holder equity
United state Citi group 112537 $million
United state JPMorgan chase 107211 $million
United state Bank of America 101224 $million
United kingdom HSBC 98226 $million
Japan UFG 83281 $million
Top 5 banking group in the world by shareholder equity
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