Currency and Financial Institutions
Currency:- Currency is a medium of exchange used commonly. Currency
has a unique characteristic of being accepted in the form of currency or as a
medium of exchange. Therefore, currency is any such item which is commonly
acceptable for payment of goods and services.
Exchange:
Exchange is the give and take of goods or services in lieu of currency or any other goods or services.
There
are various forms of currency which are used as medium of payment –
Country
|
Currency Name
|
India
|
Rupee
|
USA
|
US Dollar
|
Britain
|
Pound
|
Europe
|
Euro
|
Japan
|
Yen
|
Origin and Development of Currency
In English language, currency is known as money. The term money in
English language has originated from Moneta which is a word from Latin
language. The first Currency mint of Rome was established in the temple of
goddess Moneta and gradually, the term money started to be used for currency in
common form.
·
First 'rupee' in India was
issued by Sher Shah Suri (1540-45 CE).
Demonetization
–
Demonetization is the process of abolishing the legal validity of
the prevailing currency and removing it from circulation.
Schemes –
i.
In order to provide
financial education, Reserve Bank of India has started 'Project Financial
Literacy'. It aims at providing information regarding the central bank and
common banking concepts to target groups.
ii.
If we want to gain
expansive knowledge about the financial system, we can visit the website
http://rbi.org.in/financialeducation/home.aspx on the internet. This is a very
effective and attractive step taken by the Reserve Bank of India to provide
financial literacy.
Development of Currency
a.
Barter Exchange System:
In this
system, goods and services are exchanged in direct form through other goods and
services.
Problems
of Barter Exchange System –
·
Problems associated with double coincidence
of wants existed in barter exchange. Double coincidence of wants means that the
item which one individual wants to sell should be required by another
individual who should possess that item which is required by the first
individual.
·
Barter exchange system also lacked a standard
measure of value.
·
In this system, collection of money or wealth
or transfer of money was also very inconvenient.
·
Transfer or money or value in the form of
goods was very risky.
·
In barter exchange, another major problem
which aroused was in context to indivisible goods.
Example:- If an individual possessed a horse and he wished to
purchase a sheep, then neither he could give one entire horse nor he could
divide the part of his horse in exchange of the sheep. If such goods were
divided, then these would lose their entire importance.
b.
Metallic Currency:
Metallic
currency replaced goods currency. In the beginning, metallic goods and metallic
pieces were used in the form of currency.
It is
believed that the use of metallic coins started in China, India and Egypt.
Problem
of Metallic Currency –
·
Transfer of metallic currency was difficult.
·
Their production was expensive and it was not
possible to fulfill the increased requirement of currency through metallic
currency.
c.
Paper Currency:
Due to
limitations of metallic currency, paper currency was developed. Paper currency
is free from all those problems which existed in metallic currency.
Benefits
of Paper Currency –
·
Production of paper currency is cost
effective and its transfer is also easy.
·
Availability of paper currency can be easily
increased in order to fulfill its increasing demand.
·
Paper currency is free from all those
problems which existed in metallic currency.
Functions
of Currency and Role of Currency in the Economy
Mainly,
currency acts as a medium of currency exchange, measure of value, a measure of
delayed payments and storage of value. Along with this, it fulfils various
developmental functions and plays an important role in the economy.
Various
Functions of Currency
a.
Medium of exchange:
In an
economy, the basic role of currency is to function in the form of medium of exchange
or as a mode of payment. This function of currency eliminates the problem of
double coincidence of wants present in system.
b. A
Unit of Account or a Measure of Value:
This
means that currency acts is a common measure of value. With its help the
exchange value of various goods and services can be expressed in the form of
currency. However, the ever changing value of currency is the most important
setback of currency in the form of measure of value.
c.
Measure of Delayed Payments:
Those
payments which are not done instantly and are scheduled to me made in the
future are known as delayed payments. As loan is also a form of delayed
payment, thus loans can also be easily paid off in the form of currency.
d.
Store of Value:
·
This means that people can keep their money
or assets in the form of currency. Currency also functions in the form of store
of value.
·
The value of currency refers to the
purchasing power of currency. Currency is not the only store of value.
·
Other goods and assets also act as store of
value and in this context they compete with currency.
e.
Other Functions of Currency and its Role in Economy:
·
Transfer of value is facilitated with the
help of currency.
·
Currency provides a basis of credit to an
economy.
·
People deposit a part of their income in the
form of currency in banks. Banks create credit through this deposited money.
·
Currency has mobilized capital and has played
an important role in the economy. Due to currency, it has become possible to
transfer capital from one industry to another and from one place to another.
Investment: Investment refers to such expense which increased the
stock of actual productive assets in an economy.
Benefits
of Currency:
(i) Currency
also allows freedom of choice of goods to the consumers.
(ii) Currency
also plays an important role in production sector.
(iii) Due
to adoption of labour distribution and specialization through currency,
production on large scale has become possible.
(iv) Specialization
takes place when an economic resource produces a specialized product or
service.
Note:-
·
When production work is subdivided into
various workers and when every unit plays a specialized role in production of a
product or service, then it is known as division of labour.
·
It is not always possible to divide the total
produce or goods obtained, but it is possible to divide production into various
productive units following appropriate financial rules through currency. Due to
currency, rapid increase in domestic and international trade has become
possible.
·
At present time, the form of welfare state
has become very important. The state or government runs various schemes for the
welfare of its citizens. The government has to incur huge expenditure on these
schemes.
Savings
and Credit
Saving: The part of income which remains unconsumed is known as
saving.
Credit: The term credit refers to a party providing loan or
finance to another party.
Financial Intermediaries
Financial intermediaries are
such institutions and firms which act as an anchor or middleman between those
who provide credit and those who require it.
Features of Financial
Intermediaries –
· These
institutions obtain money from those individuals who spend less than their
earnings, i.e. they save and then they provide credit to such individuals or
institutions which require money for consumption or production.
· These
financial intermediaries always have availability of money.
· They
provide credit on reasonable interest rates and reasonable and acceptable
Institutional and Non
Institutional Sources of Credit
Financial institution is
such an institution which performs the work of deposits, loans, investments,
etc. For example, banks, cooperative committees, money lenders, local bankers,
etc.
These financial institutions
are classified into institutional and non institutional sources.
Institutions
which provide institutional credit are registered with the government and
Reserve Bank of India.
· Their
regulation, control and direction is done by the government and Reserve Bank of
India.
· They
inform about all their activities to their regulating institutions.
· These
institutions do not operate only with the motive of earning profits.
·
They also have to fulfill various important
social obligations.
·
These institutional credit to economically
weaker sections also.
·
They play an important role in establishing
economic equality by financial inclusion of economically weaker sections.
Financial
Inclusion
Financial
inclusion refers to join the poor, weak, backward and lower income group of the
society with financial services by providing them financial services at reasons
cost.
Commercial
Banks
A
commercial bank is such a financial institution which provides functions such
as accepting deposits, providing commercial loans, etc. Banks are
important financial intermediaries to perform the function of savings and
credit.
Functions
of Commercial Banks:
·
These banks accept deposits from those people
who save money and lend them to those people who are in need of money for
consumption or production.
·
Bank
acts as an anchor between people who use capital and those who save money.
·
Banks also provide an important facility,
i.e. at times of need, the depositor can easily take his money deposited in the
bank easily, therefore this type of deposit is known as demand deposit.
·
For payment through cheque, the payer who has
an account in a bank draws a cheque of a fixed amount.
Cheque-
Cheque is such an order form which gives an
order to the bank to pay a fixed amount to the person nominated in the cheque
from the account of an individual.
If we look at the cheque carefully, then we
find that there are seven entries in the crossed cheque:
1. Two
parallel slanting lines
2. Date
of issue
3. Name
of the payee
4.
Amount of payment in numbers
5.
Amount of payment in words
6.
Account number of the payer who issues the cheque
7.
Signature of the payer
In exchange of demand deposits, the facility of drawing cheques facilitates
direct payment without the use of cash.
Question: What do the banks do with the money which they accept as deposits
in accounts? Answer: Banks keep a small amount of the deposited money in the
form of cash. Provision of this part is done on the basis of possibility of
withdraw of deposits in a single day.
Role of Commercial Banks –
The importance of commercial banks in context to economic development can
be understood from the following points:
1. High rate of deposit is necessary for economic development.
2. Deposits received by people are mobilized through banks and provided to
various producers and investors in various sectors of the economy.
3. Banks make optimum allocation of resources.
Functions
of Commercial Banks –
a.
Accepting Deposits:
The
foremost and most important function of commercial banks is to accept deposits.
In
broad form, these deposits are of three types:
a.
Deposits of current account.
b.
Deposits of savings account.
c.
Permanent deposits.
Note:- Deposits
of current and saving accounts are jointly known as demand deposits. Banks
provide maximum interest on permanent deposits.
b.
Providing Loans:
Commercial
banks provide loans to all sectors of the economy such as agriculture,
industries, businesses, etc.
Note:- This loan is provided in various forms such as cash
credit, overdraft, etc.
Overdraft: This refers to providing loan by giving the freedom to
the depositors to withdraw funds exceeding the amount deposited in their
accounts.
Note:- The rate of interest on loans given by the banks exceeds
the rate of interest which the banks give on deposits. This difference in the
rate of interest taken by debtors and given to depositors is the primary source
of income for banks.
c.
Other Functions:
·
Banks collect bills and cheques.
·
They also make regular payments of insurance
premiums.
·
They provide facility of lockers and keep the
costly belongings of their customers safe.
·
Banks collect various statistical data and
provide them to various agencies.
·
They provide the facility of money transfer.
Non Institutional Sources
of Credit
Definition: Non
institutional sources are such sources of finance which are not registered with
the government and Reserve Bank of India and these do not follow the guidelines
laid down by them.
Example: Local bankers, moneylenders. landlords, their
relatives, etc, are usually included in non- institutional financial sources.
Features:
·
These institutions are very
flexible.
·
Their activities are not time
bound.
·
The process provision of
credit of these institutions is very easy and quick.
·
They do very less paper work.
·
These institutions keep very
less record of their transactions.
Few Non institutional
financial sources are discussed below:
a. Local Bankers:
These are private firms or
individuals which function just like a bank. These have been an important
source of non-institutional credit.
Following are the major
functions performed by local bankers:
1. Accepting deposits by
people.
2. Mortgaging various types of
properties of their customers.
3. Transferring money from one
place to another.
4. Conducting their business
along with banking operations.
5. Providing services to small
traders and businessmen.
6. Providing loans to debtors.
7. Serving the customers not
only as bankers but also as friends and advisors.
b. Moneylenders:
Moneylenders provide credit
purely on the basis of their own capital. They do not accept deposits from
people. They usually provide petty personal loans. They charge high rate of
interest from their customers.
c. Self
Help Groups:
Even
today, banks are not present in various rural regions India.
Question: what is the importance of self help groups in economic
development?
Solution:
1. Obtaining
loan from banks is also difficult obtaining loan from banks is also difficult
as compared to obtaining loan from personal sources.
2. Collateral
and specific documents are required to obtain loan from banks.
3. Unavailability
of collateral is one major reason due to which poor people are unable to obtain
loan from banks.
4. On
the other hand, non institutional credit providers such as moneylenders, etc.
5. Moneylenders
charge a very high rate of interest.
6. Do
not perform complete paper work and exploit the poor debtors.
In
recent years, people have employed new ways of providing credit to poor people.
One such step is based on organizing small self help groups.
Question:
what activities are performed by the members
of self help groups?
Answer:
1. Most
of the important decisions regarding the activities of saving and loans are
taken by the members of the group.
2. The
group decides about the loan to be given, its objective, its amount, rate of
interest, tenure of repayment, etc.
3. The
group is responsible for repayment of the loan.
4. If
even a single member is unable to repay the loan, then other members take this
issue seriously.
d. Chit
Fund:
Chit
fund play a significant role in promoting the habit of saving and in providing
loans. A company which manages, operates and directs chit plans is known as a
chit fund company.
Note: Chit fund is a unique saving and loan plan run in India.
This is a mutual benefit program.
Characteristics
of Chit Fund:
·
Under this, all the members of the plan form
part of a contract in which they deposit their predetermined amount of money.
·
The total amount deposited in this way is
given to any one member of the plan through a draw or by auction.
·
All the members participate in the draw or
auction and the member who is ready to take the amount after deduction of
maximum amount is declared as the winning member.
·
Every month, one member gets the amount of
prize in the form of winner.
·
The member who becomes a winner once is not
included again in the draw or auction. This means that only non-winning members
can participate in the forthcoming draw or auction under this plan.
·
The amount of deduction is the profit which
is divided equally between all the members. Next installment amount is fixed
after deducting the amount of profit.
·
The chit fund company obtains a fixed
commission from the members as per the contract in exchange of operating,
managing and directing the plan.
·
Under the plan, the winner also has to
deposit his installment per month within the fixed time period of the chit fund
plan.
