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Too good. Sometimes a bank is required by low to transfer a part of its annual profits to the reserve fund so long as amount in the fund does not become equal to its paid-up capital. The deposits are categorized as the demand deposits and the time deposits.
It is the former that represents the bulk of the money supply with public. It is on the basis of their deposit liabilities that the banks make loan and investments after keeping ascertain cash reserve ratio. Demand deposits are distinguished from time deposits. Time deposits are those against which cheques cannot be written.
Demand deposits may arise out of the credits created by a bank as a claim against itself. The cash in an asset, the deposit is a liability. The depositor is a creditor of the bank having lent its cash, and he can claim repayment at any time. A large bank, in particular, may have deposit liabilities not only for the account of the general public but also for other banks in the country. The bank may also borrow form the central bank of the country on the basis of the eligible securities or get financial accommodation in times of need or stringency by rediscounting their bills of exchange.
It may also accept some bills from its customers for collection. The amount when collected is credited to the accounts of the customers. Hence the amount under this head is shown on both the sides of the balance sheet. They become the liabilities of the bank after collection, but they are to be treated as assets before collection. The banks also accept of endorse the bills of exchange on behalf of their customers, which simply means that the bank guarantees the payment of bills at maturity.
Thus, when the bank has accepted bills for its customers it is technically liable to meet them on maturity, but since the customers are expected to meet them and have presumably given due security, this liability of the customers to the bank is an offsetting asset against the acceptance.
In addition to the above, the banks make some provision for the contingent or unforeseeable liabilities. The profit earner by the bank is also shown as the liability because it is payable to the shareholders. Banks, unlike other business organization, acquire only a very small part of their total assets by issuing capital-account claims. An even more important point is that the volume of capital-account claims or share capital changes only slowly and within narrow limits relative to bank assets.
Bank reserves, borrowings from other banks and the central bank are also very small relative to total assets.
Most of the assets of banks are acquired by creating and issuing bank credits in the form of deposit claims. The volume of deposits that the banking system can issue depends on its reserve requirements enforced by the central bank and the currency volume of reserves available to banks. In certain countries, as in India, every commercial bank is required by law to keep some cash reserves against its deposits. Cash is called the primary reserve of a bank.
By experience a bank knows how much cash reserves will have to be kept to meet the demands of depositors. A deposit with other commercial banks or with the central bank is regarded as cash by a commercial bank. In India, commercial bank are obliged, by law, to keep a certain proportion of total deposits in the form of cash reserves with the Reserve Bank of India. The success of a bank depends upon the maintenance of sufficient cash reserves to honor the cheques presented by the clients.
But only a small percentage of depositors may be withdrawing their deposits through cheques and other methods at any particular time. At the same time, if some are withdrawing, others may be depositing.
A commercial bank has therefore, to adjust its business in such a way that the amount of cash flowing in and the amount of cash flowing out should be equal, keeping of course a margin of extra cash for the sake of safety. Too much of cash will reduce the profit-earning capacity of a bank, at the same time, it should not keep too low cash reserves below the minimum considered necessary or prudent.
Money at call and Short Notice Cash, being a barren asset, should not be kept beyond the minimum necessary for safety. To meet this pressure, it may be borced to carry large cash reserves even in times when they are not required at all. The other and better alternative for the bank is to keep some highly liquid but earning assets which can be converted into cash quickly and without loss.
There are two tyupes of such assets, viz. These assets can be quickly converted into cash and without loss, as a and when the bank wants.
Hence banks regard such assets as secondary reserves as different from cash which is their primary reserve. At the same time, these assets bring in some revenue income to the bank. Short-term Bills A commercial bank like to acquire assets which are for short period generally for 90 days and which are easily marketable and hence sufficiently liquid and at the same time bring in some interest income to the bank.
These self-liquidating bills consist mainly of bills of exchange. A bill of exchange is written promises by a merchant, who has ordered certain goods, to pay a specified sum of money on a specified sum of money on a specified date. This bill may be guaranteed by a bank or a well-known merchant house-known in London as the Acceptance Houses. Besides commercial bills, there are shortdated treasury bill through which the government borrows funds for short periods.
Commercial banks like short-dated paper or bill for a number of reasons : First of all, these assets are highly negotiable and can be easily bought and sold. In countries like England, there is a special bill market in which these bills are bought and sold or discounted. Therefore, if a commercial bank requires additional funds, it can easily rediscount the bills in the bill market or the discount market.
Secondly, these bills are eligible for rediscounting with the central bank of the country. That is, if a commercial bank wants cash, it can rediscount or sell the short-term bills with the central bank. Thirdly, these bill bring in handsome interest for the commercial banks. Thus, commercial banks prefers these short-dated bills because of their high marketability as well as their interest income; they are regarded as ideal bank assets because they satisfy the twin considerations of liquidity and profit.
Loans and Advances The most profitable of all assets is bank loans and advances. This asset is universally sought after by banks.
Bank loans and advances may be made to businessmen either by the system of overdrafts of an agreed amount or by discounting bills of exchange. Loans and advances carry a high rate of interest because of the risk involved, low liquidity and the difficulty of shifting them. They involve great risk to the bank because of the possible failure of the borrowers and in extreme cases because of their insolvency and liquidation. Again, these loans and advances have a low liquidity and low shiftability in the sense that they cannot be converted into cash easily as and when the bank requires additional cash to meet withdrawals, nor is there any possibility of shifting them to other banks or institution.
As a matter of fact, all bank failure may be ascribed to faulty policies regarding loans and advances. From the point of view of safety of the bank and its liquidity, loans and advances are poor assets. But the high yield of these assets compensates for the difficulties associated with them. These assets, thus, have low liquidity but high yield.
Investments Banks make investments in the profit-yielding securities. Investments in government securities represent the book value of central and state government securities, including treasury bills and treasury deposit receipts etc. Banks may make investments in other approved securities as well.
The different types of investments are shown separately in the balance sheet. Banks regard their short-term investments as their secondary reserves as different from cash which is their primary reserve.
Properties Building, furniture and fixtures etc. They are generally shown at their depreciated value. These are, in a way, the secret reserves of the banks which can be availed of in case of crises or collapse.
The amount of assets that a bank can command depends upon the amount of its liabilities. Many types of assets are available to a bank, profitless and profitable, liquid and non-liquid.
A bank must therefore formulate a portfolio policy determining what types and proportions of assets it will acquire and hold. There are current deposits which are used by businessmen, industrialists and others to settle debts. These current deposits, in which cheques are issued, are also known as cash deposits or demand deposits. The second type of bank deposits, which are not meant for current transactions, are known as savings deposits.
They are kept in bans as a form of savings or investments so as to earn interest from the banks. The savings deposits are not held to meet the needs of the presents or the near future, but are kept by individuals as part of their total stock of wealth, Savings deposits may also be known as time deposits. On type of savings deposits is known as fixed deposits, i. The distinction between current deposits and savings deposits a matter of degree only. Money is kept in a bank for the sake of convenience.
It is used to meet excess of payments over receipts. Current deposits are useful to meet payments immediately but savings deposits are kept to settle debts in future. In the case of current deposits the depositor expects only convenience of payment of debts. In the case of savings deposits, however, the depositor expects an interest income also. Who decides the distribution of deposits into current deposits and savings deposits? It is the customer who decides whether he would prefer current deposits or savings deposits.
Besides, if a depositor feels that he has too large a volume of current deposits from which he is getting nothing, he may convert part of it into savings deposit. Likewise, a customer with savings deposit may turn part of it into current deposit. The bank has nothing to do with this. Primary and Derivative Deposits Deposits may be created in two ways: a People may deposit their cash with the banking system.
One form of money cash with the public has been changed into another form of money bank money. The initiative for creating deposits is taken by he customers themselves. Such deposits are known as primary deposits. Apparently the total volume of money remains the same through, in fact, it is not so.
Using this cash, the banking system buys assets from the market bills, bonds, debentures, etc. Now, whenever a bank buys assets from the market or ends to certain parties, it does not give to them but creates demand deposits to their name.
These deposits are secondary or derived from the primary deposit-hence they are known as derivative deposits. The initiative for creating deposits comes from the banking system. In a modern money economy, the second from the deposits has become quite significant.
When we say banks have control over deposits has become quite significant. When we say banks have control over deposits, we mean that they have control over the total volume of deposits. Let us see how the banking system is able to create the derivative deposits through acquiring assets.
Loans Create Deposits Money at call and short notice are extremely short-period loans made by a bank to speculators and brokers in the money market and the capital market i. The bank credits the deposit accounts of these speculators and dealers for their promises to repay at call or short notice. The speculators and dealers would use these deposits to pay off their creditors.
The creditors who receive cheques or drafts credit them to their accounts. Thus as a result of loan made by bank, deposits equal to the value of the loans have been created. Bills discounted refer to the commercial bills and financial bills which are short-dated paper generally for 90 days which a bank acquires from the bill market. When a bank buys or discount a bill of exchange from a party, it will credit the account of the latter if the party keeps an account with bank or it will pay the party through a cheque on itself.
The party selling the bills will deposit the cheque in its bank account. In both cases, bank deposits will increase. Bank advances, commonly known as loans, are made by the bank to industrialists, businessmen, traders and others.
When a loan is sanctioned, the bank creates a deposit in the name of the borrower. It allows the borrower to draw on 14 this deposit to pay off his creditors. In this case also, every loan a bank makes is creating a deposit. Naturally, the banks create more deposits simply by making more and more advances. Finally, investments are made by a bank when it purchases and holds Governments bonds and other securities which have a longer life than three months.
When a bank buys a bond from the Government, it places at he disposal of the Government a bank deposit which the Government can use in any way it likes. If a bank buys an old Government bond from the stock exchange, it will create a deposit in the name of the seller who is free to use the money in any way he likes.
From what we have described above, it should be clear that every time a bank acquires an earning asset, it creates a deposit in the name of the person or institution from whom the asset is purchased. Against the promises of individuals, institutions and the Government, which do not constitute money the bank gives it own promise viz, the bank deposit which is money, i.
Two points should be mentioned here. First, every asset acquired by bank an equivalent bank deposit. It is perfectly correct to state that bank loans create deposits. Bank take the initiative to give loans and advances and acquire other earning assets: by doing go, they control the total volume of deposits in the banking system.
Secondly, commercial banks monetize the debt of others. Against the promises of other to pay, the banks give their own promises to pay. The former is not money but the latter is money. In this sense, banks create money.
Limitations to Creation of Deposits An important question arises here. If a bank can buy assets just by giving its own promise to pay i. Is there any limit to its creation of deposits? We are anwering this question rather elaborately in the next section. One point, however, may be emphasized here. Against its deposits, a commercial bank has to keep cash reserves. The proportion of cash to deposits may be fixed by law or its may be determined according to convention and general usage.
As the volume of earning assets increases, the volume of bank deposits also increases but the ratio of cash deposits rises, business transactions will increase, giving rise to an increase in price levels. People, therefore, will demand more currency notes for purposes of trade and exchange.
When the public draw out cash from banks, the ratio of cash to bank deposits will decline still further. The cash ratio is thus, subject to decline on two rounds : a increase in deposits, and b drain of cash into circulation. If the absolute size of the cash reserves with commercial banks in the country is given, the maximum amount of deposits which banks can create will depend upon the cash reserve ratio to deposits.
Suppose that commercial banks have cash reserves of Rs. Then the commercial banks can create and maintain deposits worth Rs. If the volume of bank deposits is less, banks can acquire some more earning assets and increase the bank deposits also.
Of course, it is assumed that there are people willing to borrow from commercial banks. Suppose that the volume of deposits Rs. With legal cash reserve ratio at 10 per cent, commercial banks will have to reduce their deposits by disposing of some of their earning assets.
There will, thus, be a simultaneous decline of bank assets and bank deposits, till the ratio of cash reserves to bank deposits becomes 10 per cent. Thus the commercial banks have absolute control over the volume of bank deposits, subject or course to : a the supply of cash, b the public demand for cash, and c the cash reserve ratio to be maintained. The central bank enters the picture through its control of cash.
By supplying more cash, the central bank can expect commercial bank to increase their earning assets and increase their bank deposits. By reducing cash, the central bank can attempt to achieve the opposite result. The technique of Credit Creation Demand deposits or cash deposits are money are used as such, for every depositor having a current account in a commercial bank can meet his obligations through cheques drawn on his account.
Expansion or contraction of deposits, therefore, means expansion and contraction of money in the country. Now, as indicated already, banks have the power to expand or contract demand deposits and they exercise this power through granting more or less loans and advances. Now, this power of commercial banks to expand deposits through expanding loans and advances is known as credit creation. As every bank loan creates an equivalent deposit, credit creation by the banks implies also multiplication of bank deposits.
Or with a small amount of cash, they are in a position to acquire a large amount of assets. At one time, there was needless controversy regarding the ability of commercial banks to create credit. Some writers meant by bank credit bank loans and investments and, therefore, maintained that bank could never and more than the amount which it had been entrusted with by the depositors.
Suppose that a person deposited Rs. In fact, it should lend for less, since it had to maintain a small margin of cash reserve against the withdrawal of money by the depositors.
In any case the bank could not lend more than Rs. It is true that a bank cannot lend more than what it has got. But it is equally true that what is lent out by a bank comes back to the bank by way of new deposits, which may again be lent out, and so on-deposit becoming the basis for a loan or investment, which again returning to the bank as fresh deposit becomes the basis for a loan or investment, which again returning to the bank as fresh deposit becomes the basis for a new loan, and so on.
Commercial banks, therefore, are able to multiply loans and investments and thus multiply deposits. It is in this sense that banks create credit. Credit creation can be defined as the expansion of bank deposits through the process of more loans and advances and investments. Technique of Credit Creation Let us explain, in highly simplified manner, the technique or the process of credit creation by assuming: a the existence of a number of banks, A,B,C,D, etc.
The deposit of Rs. At the same time, the amount is an asset to the bank which it may use to earn an interest income. Bank A has to keep only 20 per cent reserve, i. Suppose that Bank A gives a loan to Mr. X who uses the amount to pay off his creditors.
After the loan has been made and the amount so withdrawn by Mr. X to pay ff his creditors, the balance sheet of Bank. Cash Loan to Mr. X 1, 16 Now, the creditors of Mr. X, who got Rs. This assumption is unnecessary, for the creditors of Mr. X may be banking with Bank A depositing Rs. Suppose that the bank buys bills worth Rs.
New Cash Bills 1, We can assume that the sellers of bills who received Rs. Suppose that Bank C invests Rs. New Cash Investment Now, Mr. Y who sold the long-term securities to Bank C for Rs. And this process of a deposit becoming a loan or an investment which, in turn, becoming a new deposit goes on and on till the original deposit of Rs.
The original deposit of Rs. If we add up all these deposits, the total will be Rs. This is the process of deposit multiplication through the process of credit creation. The higher the cash reserve ration, the lower will be the deposit multiplier.
The total deposit creation will be additional cash M multiplied by the deposit multiplier. However, it is not really necessary that there should be many banks, it is just sufficient that there is only one bank. Even then, the process of credit creation will be the same.
That is, whenever the bank ahs excess cash reserves, it will lend or invest the same; this amount will come back to the bank in the form of a new deposit which will become the basis for yet another loan, and so on. The money which goes out from the bank by way of loans etc. Thus credit creation will take place, whether we consider only one bank in an isolated town or we consider the banking system as a whole.
Credit Contractions Just as there is multiple expansion of deposits there is multiple contraction of bank deposits too, when cash is removed from the banking system. Suppose there are a number of banks in the banking system.
And each bank has to keep a cash reserve ratio of 20 per cent against deposits. Let us further assume for the sake of simplicity that every bank ahs a cash reserve of Rs. Suppose that a depositor withdraws Rs. But the Bank has only Rs.
Cancel Forgot your password? Showing all editions for 'Banking : theory, law and practice'. Year 1 1 5 3 3 Language English. Displaying Editions 1 - 10 out of Print book. Banking : theory, law and practice by E Gordon; K Natarajan;.Thank you for interesting in our services. We are a non-profit ad that run this website to share documents. We need your help to maintenance this website. Please help us to share our service with your friends. Share Embed Donate. Basu : 2. Muranjan S. Banking theory law and practice pdf free download early bankers, the Jews in Lombardy, transacted their business on benches in the market place. This appears to be more possible. There is evidence to show that the temples of Babylon were used as banks, and such great temples as those of Ephesus and of Delbhi were the most powerful of the Greek banking institutions. But the spread of irreligion soon destroyed the public sense of security in depositing money and valuables in temples, and the priests were no longer acting as financial agents. The Romans did not organize State Banks as did the Greeks, but their minute regulations, as to the banking theory law and practice pdf free download of private banking, were calculated to banking theory law and practice pdf free download the utmost confidence in it. With the end of the covilisaiton of antiquity, and as a result of administrative decentralization and demoralization of the Government authority, with its inevitable counterpart of commercial insecurity, banking degenerated for a pracgice of some centuries into a system of financial makeshifts. But that was not the only cause. Even now some Mohammedans, in obedience to the commands contained in that behalf in their religious books, refuse to accept interest on money loans. However, upon the revival of civilization, growing necessity forced the banking theory law and practice pdf free download in the middle of the 12th century, and banks were established at Venice and Genoa, autodesk 3ds max 2015 free download full version in fact they did not become gheory as we understood them today, till long after. Again the origin of modern banking may be traced to the money dealers in Florence, who received money on deposit, and were lenders of money in the 14th century, and the names of the Bardi, Acciajuoli, Peruzzi, Pitti and Medici soon became famount throughout Europe, as bankers. At one time, Florence is said to have had eighty bankers, though it banking theory law and practice pdf free download boast of no public bank. DOWNLOAD PDF - KB. Share Embed Donate. Report this link. Short Description. banking. BANKING THEORY – LAW AND PRACTICE. Banking Theory, Law and Practice book. Read 2 reviews ebook. Published January 1st by Himalaya Pub. House. More Details ISBN. Showing all editions for 'Banking: theory, law and practice', Sort by: eBook (11) Banking theory, law and practice. by Gordon E.; Natarajan K. Print book. BANKING THEORY, LAW AND PRACTICE. UNIT- I. Introduction to banking RBI: Evolution of central bank – Banking Regulations Act, TEXT BOOK. 1. Banking: Theory, Law and Practice. Front Cover. E. Gordon. Himalaya Publishing House, - Banking law - pages. 1 Review. Banking Theory Law N Practice. Front Cover · Rajesh. Tata McGraw-Hill Education, - Banks and banking - pages. 6 Reviews · Preview this book». The Theory and Practice of Banking This book covers the following topics: Money a Commodity, Coinage, Legal Tender, Gold as a Metal, Gold Production and. and Practice Gordon Natarajan - AbeBooks Banking Theory Law And. Practice.pdf - Free download Ebook, Handbook, Textbook, User. Guide PDF files on the. Banking law and Practice- S.S Gulsan and Gulsan Kapoor. 4. is done by making transfer entries in their accounts on the principle of book-keeping. To so many people now can download user-friendly banking apps or easily find an ATM to. Kindly send me financial management of b. Shop with an easy mind and be rest assured that your online shopping experience with SapnaOnline will be the best at all times. Plz provide me notes of computer application in business 3rd year. Tarun says 3 years ago. Bhilmayur says 1 year ago. In this article, we also provide complete details of the Bcom syllabus and Bcom subjects. Ramther Smith Online. Maadhav says 2 years ago. Furthermore, with an eye towards the new millennium, in November , Congress sought to revitalize and modernize the financial services industry with the passage of the Gramm-Leach-Bliley Act, perhaps the most important piece of federal banking legislation since the Banking Act of Paperback Edition no. Plse show me income tax 2 year book soll plse sent me important book Contact me Share this article with other B. Devanand Sathe says 2 years ago.