Economics Project 1

Topic: Balance of Payment

Name of Student : ANMOL
BHARDWAJ
Class/Sec : XII-A
Roll No: 41
 Acknowledgement
I would like to start by thanking my teacher
Mrs. Neha Luthra who helped and guided me
to choose and create this project. Without their
help I would have not been able to start and
enjoy earning from this project.
Secondly, I would like to thank my parents
without whose help I would not have been
able to meet the tight deadline.
Lastly, I would like to thank my friends who
have helped me finish this project in the given
time frame.
 Content

1. Meaning of balance of Payment

2. Component

3. Balance of trade

4. Balance of payments disequilibrium

5. Causes of adverse balance of payments

6. Measures to correct disequilibrium

7. Foreign exchange rate

8. Conclusion
 Meaning of Balance of Payments
Balance of Payments is a statement which records all the monetary
transactions made between residents of a country and the rest of the world
during any given period. This statement includes all the transactions made
by/ to individuals, corporates and the government and helps in monitoring
the flow of funds to develop the country

Balance of Payment statement of a country indicates whether the country

has a surplus a deficit of funds i.e. when a country's Export is more than its
import, it's Balance of Payment is said to be in surplus. On the other hand,
BOP deficit indicates that a country's imports are more than its exports

It reveals its financial and economic status. It determines whether the

country's currency value is appreciating or depreciating It helps the
government to decide on fiscal and trade policies.
 Components
The balance of Payment consists of three main components - current
account, capital account and financial account. The current account must
balance with the combined capital and financial accounts

CURRENT ACCOUNT-
The current account monitors the flow of funds from goods and service
trade between Countries. It includes revenue from tourism, transportation
receipts, revenue from specialized services and royalties from patents and
copyrights.

CAPITAL ACCOUNT - It monitors the flow of

international capital transactions. These transactions. include the purchase
or disposal of non-financial assets and non-produced assets. It records the
flow of financial assets by migrants leaving or entering a country and the
transfer or sale of fixed assets.

FINANCIAL ACCOUNT –
It monitors the flow of fund pertaining to investments in business, real
estate and "stocks. It also includes government owned assets. such as gold
and SDRS held with IMFS.
 BALANCE OF TRADE
Balance of trade shows the balance of exports and imported of visible
goods given year in a It is the difference between Export of goods and
import of Goods It refers to the merchandise portion of balance of
payments, meaning it is the value difference between goods exported and
the value of goods imported during a year. The balance of trade need not
balance of a country exports more goods than it as imports, it has a or
surplus in favorable balance the balance of trade on the other hand if it
imports more Goods than it exports it has in favorable balance of trade or
deficit in the balance of trade.

Balance of Trade = Export of goods - Import of Goods

For example if India exports goods wort Rs. 6500 crore and imports goods
worth Rs. 8500 Crore. I will have a deficit in its balance of trade of Rs. 1500
Crore
 BALANCE OF PAYMENTS DISEQUILIBRI

A country's export and imports are influenced by many factors

Disequilibrium in the balance of payments of a country may
appear either as a surplus or deficit If autonomous receipts are
less then autonomous payments, then the balance of payments is
in deficit. On the other hand; if autonomous receipts. are greater
than autonomous payments, the balance of payments is in
surplus. A surplus is not a problem but deficit in the balance of
payments often create problems for the economy
 CAUSES OF ADVERSE BALANCE OF PAYMENT

1 FALL IN FOREIGN DEMAND-

Balance of payments deficit may arise because of shift in the foreign away
of country's goods to products of other country's It may be because of
change in tastes, fashion of foreign consumers or because of Lower price of
other countries. It may be due to recession in income in foreign countries

2 INFLATIONARY PRESSURES IN THE ECONOMY-

A high rate of inflation at home encourages imparts by making import
cheaper. It also leads to decrease in the country's competitiveness in the
world markets which reduce its export. Increase in import and decrease in
export leads to unfavorable balance of payments

3 DEVELOPMENTAL EXPENDITURE –
Developing countries have to depend on developed nations of the world for
the supply of machines, etc. This pushes import bill. These countries are net
able to export to finance the increased imposts. This leads to deficit In the
balance of payments.
4 INCREASE IN COST STRUCTURE OF EXPORT INDUSTRIES –
Increase in the cost structure of a country's export industries reduces the
volume of export by reducing the competitiveness of these industries in the
world markets. The cost structure may increase due to higher wages, higher
price of raw material.

5 DECREASE IN SUPPLY –
Agricultural production. May fall because of natural factors like facture of
crops. Similarly, industrial production may fall due to labor strike, shortage
of raw materials etc. As a result, export fall and import increase to fulfill
scarcity of goods.

6 APPRECIATION IN THE EXCHANGE RATE –

Appreciation of a country's currency increases the top external value.
currency cheaper and export expensive. This makes import cheaper and
export expensive.

7 INCREASED DEBT BURDEN –

The developing countries of the world need to import capital largely in the
form of portfolio investment to promote their development. This has
created a large debt on account of debt service like interest. Interest
payments need to be done to the developed countries.

8 POPULATION PRESSURE -
An increase in population of many underdeveloped countries has led to
increased" demand for all types of consumer goods. As a result export
surplus has fallen.

9 POLITICAL FACTORS-
First, political turmoil and instability in a number of countries like
Afghanistan have adverse effect on their balance of payments second,
economic sanctions imposed by UNO and developed countries are also
responsible for adverse balance of payment

10 DEMONSTRATION EFFECT-
People of underdeveloped countries try to imitate the consumption pattern
of people of developed countries. This leads to increase in the imports of
deficit - consumer durable goods leading to in the balance of payments.
 MEASURES TO CORRECT DISEBUILIBRIUM
1 DEPRECIATION –
Depreciation of the country's currency will wipe out deficits in the balance
of payments. Depreciation of currency means rise in the foreign currency
price of as a result, imports will become costlier and export cheaper.

2 DEVALUATION-
when a country devalues its currency then imports are expensive to
domestic consumers and its exports cheaper in foreign country. If demand
and supply elasticities are high, then imports will fall, and exports will rise.

3 IMPORT CONTROL -
Imports may be controlled through quotas and tariffs. Quates limit the
volume. of imports by applying quantitative restrictions. The government
may increase foreign duties or tariffs This will raise the prices of imported
goods and reduce imports

4 EXPORT PROMOTION-
First, it may reduce export duties so as to encourage exports second cash
assistance can be given to exporters to stimulate exports, various facilities
like quality control, provision Thirdly of market information arranging
exhibitions of exportable goods in foreign countries can be provided to
promote exports

5 EXCHANCE CONTROL –
The government may try to hold complete control over all dealings foreign
exchange by directing all the exports to sell their foreign exchange earnings
to the central bank and all the importers to by foreign exchange from the
central bank. Foreign exchange is rationed out among the license- holders
for specified commodities, who only can import these commodities.
Exchange controls rule out the free operation of market force

6 PRODUCTION OF IMPORT SUBSTITUTES-

If the industries producing import substitutes develop then import will be
replaced by their import substitutes. Also, these industries may turn out to
be export earners as well.
7 MONETARY POLICY –
The central bank can reduce the Volume of credit by raising the bank rate,
by selling the approved securities in the open market and by raising cash
reserve ration. If bank rate is increased credit decreases, the producers in
then commercial banks with increase their lending rate as a result
borrowing from bank will decrease. As the availability of will borrow less. A
decrease in investment will decrease in income and fall imports.

8 FISCAL POLICY –
The restrictive fiscal policy. Is characterized by increase in taxes and
decrease in government expenditure. An increase in direct taxes will reduce
the disposable income result in reduction of consumption and a decrease in
imports. A decrease in transfer payments like pensions effect the
consumption since the people benefiting from transfer payments are low-
income groups. A decrease in consumption and investment expenditure by
the government will lead to fall in income and fall in imports.

9 CAPITAL IMPORT - Deficit in the trade balance can be corrected by short

run by borrowing capital from the individuals and governments of other
"countries as well as by borrowing from international financial institutions
like World Bank, IMF etc. Countries like India may use the SDR with IMF to
meet deficit in the balance of payment. SDRS are allocated by the IMF to
member countries. They include major foreign currencies like U.S dollars
pound sterling, euro, chines yen etc.
 FOREIGN EXCHANGE RATE

Trade between nations can take place if it is possible to exchange the

currency of one country for that de form of bank departs, cheques et
payable. in foreign exchange U.S those countries are known as dollars,
British Pound are foreign exchange for India. The foreign exchange market
is the market where foreign exchange is traded Foreign exchange rate
refers to the hate at which the currencies of different countries are traded.
If you want I American dollar, we have to give 75 supers of India

FIXED EXCHANGE RATE SYSTEM

In a fixed exchange rate system, the rate of exchange is officially fixed by

the central bank of the country by official action such rate does not very
with change in demand and Supply of foreign currency

FLEXIBLE EXCHANGE RATE SYSTEM

In a flexible exchange rate system, exchange rate is left free to be

determined in the foreign exchange market by the force of demand and
Supply this, the central bank allows the exchange rate to adjust to equate
the demand and supply of foreign. exchange
 DEPRECIATION
Depreciation refers to a fall in the free-market value of domestic currency
relative to the currencies of other countries in the foreign exchange rate

APPRECIATION
Appreciation means a rise in the free - market value. of domestic currency
relative to currencies of other countries in the foreign exchange rate

DEVALUATION
Devaluation refers to an action undertaken by the central bank to decrease
the value of domestic currency relative to the currencies of other countries
under a system of fixed exchange rates

REVALUATION
Revolution refers to an action undertaken by central. bank to raise the
value of domestic currency relative to other currencies under a system of
fixed exchange rates.
 EXCHANGE RATES AND DOMESTIC PRICE
OF
TRADED GOODS
A change in the exchange rate affects the domestic price of traded goods. A
depreciation in the value of domestic currency increases the domestic price
of traded goods. If INR depreciates in value so that it takes Rs.60 to buy 1
US $, the rupee price of the jeans now will be 20x60=1200 This depreciation
of domestic currency increases the domestic price of imported goods. On
the other hand, if INR appreciates so that it takes Rs.45 to buy 1 US $, the
price of Jeans will fall to 20x45 = 900 This appreciation lowers the domestic
price.

EXCHANGE RATE AND IMPORTS AND EXPORTS

A depreciation of domestic currency increases the domestic price of a
country importable an increase in import prices leads to a fall in demand for
import. On the other hand, a higher price of dollar to supe Indian export
becomes cheaper. Appreciation reduces the domestic price of a country's
imports. This leads to increase in the quantity demanded of imported good
on the other hand, a fall in exchange rate will make the Indian goods
expensive in terms of dollars. This will discourage the exports of Indian
goods.
 DEMAND FOR FOREIGN EXCHANGE
The demand for foreign exchange in a country arises because an importer
in the country has to acquire foreign exchange with which to buy foreign
goods. Demand for foreign exchange arises in order to import goods and
services by domestic residents, to purchase financial assets abroad, to
undertake investments abroad, to send gifts abroad etc. The demand for
foreign exchange varies inversely with foreign exchange. As the exchange
rate falls, more foreign exchange is demanded and vice versa.

DEMAND CURVE OF FOREIGN EXCHANGE

In the Fig, the demand for foreign exchange (US dollar) and rate of foreign
exchange on the X-axis and y-axis respectively. The negatively sloped demand
curve (DD) shows that more foreign exchange (OQ1,) is demanded at a low rate
of exchange (OR1), whereas demand for US dollars falls to OQ2 when the
exchange rate rises to OR2
 SUPPLY FOR FOREIGN EXCHANGE
Supply of foreign exchange arises because of exports. of goods from the
domestic country to other countries. The exports of goods foreign currency,
which they would like to exchange for the domestic currency - For example,
the supply of dollar in the foreign exchange market arises because of Indian
exports of goods and services to the US. Similarly supply of foreign exchange
arises when foreign tourists come to India and do expenditure in India or when
foreign purchase of bonds and shares of home country to undertake direct
investment in India or when Indian persons working abroad send remittance to
their families. The supply of foreign exchange varies as the rate increase
directly with the exchange rate Supply of foreign exchange increases.

SUPPLY CURVE OF FOREIGN EXCHANGE

Supply curve of foreign exchange slope upwards due to positive relationship
between supply for foreign exchange and foreign exchange rate. In the graph
supply of foreign exchange (US Dollar) and rate of foreign exchange have been
shown on X-axis and Y- axis. The positive sloped supply curve (SS) shows that
supply of foreign exchange rises from OQ1, to OQ2, when the exchange rate
rises from DR1, to OR2
 EQUILIBRIUM EXCHANGE RATE
The equilibrium exchange rate is determined at the point where the demand
for and supply of foreign exchange are equal. In the graph, rupee price of a
dollar is on vertical axes and quantity of dollars on horizontal Demand curve
DD shows how many dollars India demands at different rates of exchange and
supply curve ss shows how the supply of dollars changes as the exchange rate
varies the demand and supply curves of foreign exchange intersect at EQ. The
equilibrium exchange rate is r0 and OQ of foreign exchange is demanded and
supplied. At the exchange rate to the Indian demand for dollars equal
American supply of dollars. If the price of dollar in term of Indian supper is low
i.e., r1, the demand for dollar exceeds the supply of dollars by AB amount
There will be excess demand of dollars. At the rate r2, the quantity of dollars
supplied exceeds the quantity demanded by GH. In view of excess supply of
foreign exchange, the value of foreign currency will increase this will lead to
fall in exchange rate from Or2, to Oro where the two curves intersect, the
quantity demands of dollars equals the quantity supplied and the exchange
rate is in equilibrium.
 CHANGE IN EQUILIBRIUM EXCHANGE RATE
If the demand for foreign exchange increases, because of deficit in the balance
of payments to increase imports, the demand curve for foreign exchange at
the initial will exchange shift from rate ro for foreign exchange merges due DD
to D, D₁ an excess demand. to the extent of EOr: This deficit in the balance of
payments of EOk leads to depreciation of Indian Rupee and appreciation of
American dollar. Because of the shift in demand, Indians demand a larger
amount of dollars which the American supply at a higher price. As a result, new
equilibrium E, is established corresponding to which, is the new exchange rate
an increase in the supply of foreign exchange (US dollars) has resulted in shift
of supply curve of foreign exchange from SS, to S1S1. At initial exchange rate ro
an excess supply of foreign exchange has led to appreciation of Indian Rupee
i.e., a fall in exchange rate. As a result, new equilibrium E2 is established
corresponding to which r2 is the new exchange rate.
 Conclusion
The Balance of Payments is a statement or record of all monetary and
economic transactions made between a country and the rest of the world
within a defined period. These records include transactions made by
individuals, companies and the government keeping a record of these
transactions helps the country to monitor the flow of money and develop
policies that would help in building a strong economy.
Economics Project
Topic: COMMERCIAL AND CENTRAL BANK
Name of Student : ANMOL
BHARDWAJ
Class/Sec : XII-A
Roll No: 41
 Acknowledgement
I would like to start by thanking my teacher
Mrs. Neha Luthra who helped and guided me
to choose and create this project. Without their
help I would have not been able to start and
enjoy earning from this project.
Secondly, I would like to thank my parents
without whose help I would not have been
able to meet the tight deadline.
Lastly, I would like to thank my friends who
have helped me finish this project in the given
time frame.
 Content
1 Meaning of bank

2 Types of Bank

3 Commercial banks.

4 Functions of commercial banks

5 Credit Creation

6 Process of credit creation

7 Limits to credit creation

8 Role of Commercial banks in Econ Economy

9 Central Bank

10 Functions of a central bank

11 Difference of central and commercial bank

12 Credit Control

13 Conclusion
 What is a bank
A Bank is a financial institution that accepts deposits of money from the public,
withdrawable by cheque or otherwise and uses the money so collected for
lending to the households, the firms and the government

TYPES OF BANKS
1 Central Banks

2 Commercial Banks

3 Cooperative Banks

4 Regional Rural Banks

5 Land Development Banks

6 Exchange Banks

7 Exim Banks.

8 Development Banks.
 COMMERCIAL BANKS

Commercial banks are the most important Source of institutional source of in

credit in India. At present Indian Commercial beaks can be classified into three
broad categories

1 PUBLIC SECTOR BANKS –

Public sector banks are those banks, which are owned and managed by the
government or some agencies of the government Examples are Allahabad
bank, Andhra bank, Bank, Oriental Bank, Punjab National Bank etc. Public
sector banks have sponsored Rural Regional Banks (RRB)s as well.

2 PRIVATE BANKS –
Private sector Banks are banks
which are in the hands of private bankers. The major private sector banks in
India are ICICI Bank, HDFC Bank, Axis bank, ING Vysya Bank. These private
sector banks have come to be known as banks. new generation tech savvy
banks

3 FOREIGN BANKS-
Foreign banks operating in India are the wholly owned by subsidiaries of
branches incorporated in foreign banks, major foreign banks are ABN AMRO
Bank, American Express Bank Ltd, Citibank, Standard Chartered These banks
have bought in the latest technology.
 FUNTIONS OF COMMERCIAL BANKS
1. ACCEPTANCE OF DEPOSITS-
The primary functions of a commercial bank are to accept deposit from
individuals, firms and other institutions Banks accept mainly three types of
deposits:

(a) CURRENT ACCOUNT DEPOSITS - Deposits in current account are payable on

demand. That is why current account are also known as demand deposits
Money can be withdrawn without any restriction by cheques by businessman
or traders.

(b) SAVING ACCOUNT DEPOSIT - Saving account deposits are payable on

demand and money can be withdrawn by cheques. Bank imposes a limit on the
amount and number of withdrawals made from this account. during a
particulars period.

(c) FIXED DEPOSIT ACCOUNTS - Money in this account is deposited for a fixed
period like 6 months, I year or more. They do not enjoy cheque facilities. Fixed
deposits are interest earning deposits.
2. ADVANCING OF LOANS –
Banks extends loans and advances on changing interest from the borrowers
Backs make profit out of these transactions.

(a) CASH CREDIT-

It is the type of loan which is given to the burrower against his current assets.
The entire sanctioned amount of loan by the bank is not given to the borrower
at a particular time. The bank opens an account in the name of the barrower
and allows him to withdraw the borrowed amount when he requires the
money.

(b) OUTRIGHT LOANS AND ADVANCES –

These loans are given on short term and medium term the entire amount of
the Loan is sanctioned to the borrower's current account on which he has to
pay interest to bank.

(c)OVERDRAFT FACILITIES –
when a customer gets an overdraft facility from a bank, he is allowed to draw
cheques in excess of the am balance standing in his credit to the extent of the
amount of overdraft

(d) DISCOUNTING BILLS OF EXCHNGE –

A bill of exchange is drawn by a creditor on the debtor specifying the amount
of debt and also the date when it becomes payable. Such bills are normally
issued for a period of 90 days.

3. FACILITATING OF PAYMENTS THROUGH CHEGUE-

we can receive payments from others through cheques and deposit these
cheques in our bank. Similarly, we can make payments to others through
cheques.

4. TRANSER OF FUNDS-
Banks help in the remittance or transfer of funds safely from one place to
another through the use of credit instruments like cheques, drafts, pay orders
etc.
5. AGENCY FUNCTIONS-
Banks charge commission or service charge for agency function. The banks
collect payments made through cheques, drafts on behalf of their customers.
They make and collect payments behalf of their customers. Banks act as agents
of their customers in the sale and purchase of stock. They reader service in
buying selling foreign currency, national saving certificates the banks act as
trustees and executors.

6. GENERAL UTILITY SERVICE –

Commercial banks provide locker facility for safe custody of Jewelry and other
valuables, issuing traveler’s cheques and gift cheques, providing credit cards,
helping their customers in providing tax assistance.

7 CREDIT CREATIONS –
In the process of acceptance of deposits and granting of loans, commercial
banks are able to create credit They are able to grant more loans than the
amount of initial or primary deposits made by the customers.
 CREDIT CREATION
Commercial Banks are the unique financial institutions as they create deposit
money. Power of commercial banks to create money arises from two
important factors.
a) on the basis of primary deposits commercial banks are able to create
derivate deposits.
(b) Commercial banks are able to create multiple deposits because they know
that all the deposit holders don’t withdraw money from the banks at the same
time. Therefore, they can meet the cash demand on their depositors by
keeping a small cash reserve and can use excess reserve to give loans and
advances.

PROCESS OF CREDIT CREATION

1. We take a situation, of multiple banking system. we assume that there are
many commercial banks such as Bank of Baroda, Syndicate Bank etc. in the
country

2. It is assumed that minimum legal cash reserve ratio is 20 percent. Thus, each
bank is required to keep 20 percent of its deposits in the form of cash reserves
with it.

3 Excess cash reserve is used in and advances. extending loans

4. One particular bank, say Bank of Baroda, receives a cash deposit of £ 1000
from its customers.

5. For the sake of presentation, it is assumed that the amount of loan drawn by
a customer of one bank is transferred in full to second bank, and of the second
bank to the third bank and so on.

6. Each bank starts with the initial deposit which is deposited by its depositor
as a result of payment received from the borrower of the Other Bank.
1
____
Increase in Deposits= X ΔD
RR
where RR is the required reserve ratio and DD is the initial change in the
volume of deposits.
 LIMITS TO CREDIT CREATION
1 TOTAL AMOUNT OF CASH RESERVES –
The total amount cash reserves of a country determines the amount of credit
that can be created by banks. The larger the cash reserves, larger will be credit
created by commercial banks.

2 CASH RESERVE RATIO-

The power of commercial banks to create credit depends upon the ratio of
cash reserves to deposit. The smaller the cash reserve ratio, more will be the
power of the banks to create credit.

3 BANKING HABITS OF PEOPLE –

If people are in the habit of living cheques, drafts, bills etc. in their business,
banks need to keep a smaller amount of cash reserves. Their power to create
credit will be more. But if people use more of currency in making payments
then banks will require more cash reserves.

4 NATURE OF SECURITIES OFFERED-

Banks advance Loans to customers on collateral security like shares, property
etc which the banks sell off in case the loan is not repaid. If proper securities
are not available with public, a bank cannot create credit.

5 BUSINESS CONDITIONS –
During the periods of business property, businessman will take loans from
banks for investment. so credit expands, but during business depression,
businesses will not take loans so credit creation power is less.

6 Monetary policy of Central Bank-

The central bank can influence the amount of cash reserve with commercial
banks by employing credit control measures such as bank rate, market
operations etc.
 Role of Commercial Bank In Economics
1 MOBILISATIONS OF SAVINGS –
Commercial banks provide to households the agency where they may deposit
their savings to earn interest income was dot of security.

2 ACCELERATING RATE OF CAPITAL FORMATION –

They help in mobilising the idle savings of the people and them available for
productive investment.

3 ROLE OF FOREIGN TRADE –

They help foreign trade by providing payments arrangements for the importers
and exporters and by undertaking foreign exchange business

4 PROVISION OF FINANCE AND CREDIT-

Commercial banks play a vital role in providing finance and credit for the
industry and trade.

5 PROMOTING ECONOMIC DEVELOPMENT-

Banks provide funds for all types of production activities incorporated in the
plan. Abo they help in accelerating capital formation Banks promote balanced
regional essential development in the country by providing financial
infrastructure and funds for backward regions.
 CENTRAL BANK
A central bank is the apex institution in the banking and financial structure of
the country. It is specifically entrusted with the responsibility of formulating
the monetary and credit policy of a country. It is called Reserve Bank of India in
India
FUNCTIONS OF A CENTRAL BANK

1 BANK OF ISSUE –
Central bank is the bank of issue Currency notes and coins issued by the
central bank are legal tender. In India with the exception of one rupee notes,
the entire note: issue is done by the Reserve bank of India.

2 BANKER,FISCAL AGENT AND ADVISER TO GOVERNMEN-

As a banker to the government, the central bank performs the same functions
as the commercial bank for their customers. The central bank receives deposit
of cash etc. from the government. It provides cash to the gout for paying
salaries. It gives short term. loans to the government. As Fiscal agent it
manages public debt It issues new loans on behalf of the government, receives
subscription to these loans pays interest and repays them.

3 BANKER TO THE BANKS –

Central banks are the custodian of cash reserves of the commercial banks The
banks provide credit to the commercial banks It provides financial assistance to
the banks by discounting the bills of exchange.

4 CUSTODIAN OF NATION'S FOREIGN EXCHANGE RESERVES –

ALL the foreign exchange transactions of a country are routed through the
central bank It tries to maintain stability of the exchange rate It enforces
exchange control regulation prescribed by the government.

5 CLEARING HOUSE FOR TRASNSFER AND SETTLEMENT OF MUTUAL CLAIMS OF

COMMERCIAL BANKS-
Every day the customers of different banks issue cheques drawn on their
banks. This creates the need of setting claims off the commercial banks on
each day since commercial banks keep their cash reserves with central bent, it
is easier to settle their claims on each day. by making transfer entries in their
accounts maintained with central banks, without involving transfer of funds.

6 CONTROLLER OF CREDIT –
Central bank controls credit creation by the commercial bank For this central
bank adopts various quantitative and qualitative methods of credit control
 Differences of Central and Commercial Bank

CENTRAL BANK COMMERCIAL BANK

work for the public welfare and Operates for Profit. the majority of
economic development of a country. stake is held by the government as
A central bank is governed by the well as Private sector
government of a country
Controls and regulates the entries Operates under direct control of
banking system of a country central bank.
Does not deal directly with public Deals directly with public
Issues currency and Control the Does not Issue currency, only adds to
supply of money in the market the approval of central bank Acts as a
state or private owned institution
Acts as a state owned institution Acts as a state or private owned
institution
Acts as an agent of central bank Acts as an agent of central bank
Government
 CREDIT CONTROL
Monetary management is the most important function of a central Bank The
Central bank uses monetary policy, for monetary management. Monetary
policy is the policy. of the central bank to control and regulate the availability
and flow of credit with the public. as the cost and use of money for achieving
certain predetermined objectives of economic policy as well Central bank
adopts various instruments of credit control

QUANTITATIVE CREDIT CONTROL METHODS

These methods seek to control the overall quantity of credit and cost of credit
in general.

1 BANK RATE –
The bank rate. or the discount rate is the minimum rate at which the central
bank gives loans and advances the commercial banks or a rediscounts the
approved bills of exchange and government securities held by the Commercial
banks.

2 OPEN MARKET OPERATIONS-

It refers to the sale and purchase of government and other approved securities
by central bank in the money and capital markets.

3 CASH RESERVE RATIO-

It is the minimum percentage of the total deposits with the commercial banks
which are required to maintain in the form of cash reserves with the central
bank.
 QUALITATIVE CREDIT CONTROL METHODS
These methods of credit control aim at regulating and controlling the
allocation of credit among various users rather than influencing the general
availability of credit.

1 REGULATION OF CONSUMER RENT

It aims at regulating the consumer instalment on hire purchase finance. It is a
method of using bank credit by the consumes to buy expensive durable
consumer goods.

2 REGULATION OF MARGIN REQUIREMENT

Banks do not give loans equal to the full amount of The value of the security
but of an amount which is less than its value. The difference is called margin
requirement Banks keep this margin to protect themselves against any fall in
the value of the security.

3 CREDIT RATIONINGS
It aims at limiting the maximum amount of bank Loans and advances as well as
in certain cases, fixing the maximum limit of loans for specific purposes.

4 DIRECT ACTION
It refers to directives issued by the central bank to commercial banks from
time to time to regulate lending and investment activities. their

5 MORAL SUASION
It is the method of persuasion, request, informal suggestion and advice to the
commercial banks by the central banks. Central bank convinces the meeting of
the heads of the commercial banks and explains to them the need of adoption
of a particular monetary policy and appeals to them to the follow the policy.

6 PUBLICITY
The central bank expresses its view about various monetary and banking
policies it may put forward its Views by using facts of and figures through the
media of publicity.
 CONCLUSION
A bank is a financial institution that accepts deposits and recurring accounts
from the people and creates a demand deposit lending activities can be
performed either directly or indirectly through capital markets Banks are
essential for the fast Economic Development of the nation There are different
kinds of banks in an economy ie private bank, government bank etc. It also
helps in strengthening the commercial activities as well as domestic process.
Bank is one of the most important aids to trade Banks accept deposits, grant
loans, make payments of bills rent etc on behalf of its customers!