Our Business Studies Notes
Part A – Principles and Functions of Management
Part B – Business Finance and Marketing
1. Meaning of Banking
Banking refers to the activities of accepting deposits from the public and lending them to individuals and businesses for earning profits.
Commercial Banks – Institutions that perform banking functions with the aim of earning profit.
Central Bank – Apex monetary authority that regulates and supervises the banking system (In India – Reserve Bank of India).
2. Commercial Banks
Primary Functions
Accepting Deposits
Demand Deposits – Payable on demand (current and savings accounts).
Time Deposits – Fixed-term deposits (fixed deposits, recurring deposits).
Lending of Funds
Loans, cash credit, overdrafts, and discounting of bills of exchange.
Secondary Functions
Agency Functions – Collection of cheques, payment of bills, purchase/sale of securities, etc.
General Utility Functions – Locker facilities, traveller’s cheques, foreign exchange dealings.
3. Credit Creation by Commercial Banks
Banks keep a fraction of deposits as Cash Reserve Ratio (CRR) and lend the rest.
The process of lending creates credit (secondary deposits) in the economy.
Credit Multiplier = 1 / CRR
Greater the lending capacity, greater the money supply in the economy.
4. Central Bank (Reserve Bank of India)
Functions
Issuing Currency – Sole authority to issue currency notes in the country.
Monetary Policy Implementation – Controls money supply and interest rates.
Regulation of Banks – Supervises commercial banks and ensures financial stability.
Lender of Last Resort – Provides emergency funds to banks in crisis.
Maintaining Foreign Exchange – Manages exchange rates and reserves.
5. Credit Control Measures
Quantitative (General) Methods – Affect overall credit in the economy:
CRR (Cash Reserve Ratio)
SLR (Statutory Liquidity Ratio)
Repo Rate & Reverse Repo Rate
Open Market Operations
Qualitative (Selective) Methods – Direct credit to specific sectors:
Credit rationing
Margin requirements
Consumer credit regulation
6. Role of Banking in the Economy
Mobilises savings for investment.
Facilitates trade and industry growth.
Promotes capital formation.
Maintains economic stability through monetary control.