MONEY BANKING SYSTEM
The evolution of money banking system around the world has an interesting beginning. Back in time – Quite a few millennia ago – a person could exchange a good with another person, but only if the other person required that good and most importantly, had the requisite good to offer which the first person wanted. This was barter system, I prefer to call it as double coincidence as it was difficult to find the person with exact need to barter.
Let us take an example from the present times, Suppose you are good at singing and would like your child to learn dancing. If money did not exist, transactions would have been difficult. The evolution of money in modern times has made our lives immensely simpler.
HOW BANKS MAKES PROFITS – MONEY BANKING SYSTEM
The progression of money did not stop there, A bank is, after all a profit making entity and must earn income through some activities. They earn a profit as a consequence of three tendencies of the depositors:
- When people deposits money in a bank, generally they do not withdraw money immediately. Though this is a forgone conclusion.
- If people do withdraw cash from their bank accounts sooner or later they will do not withdraw it in full.
- People do not withdraw money simultaneously with others.
A bank is cognizant of all its three features. Therefore, it keeps aside as reserve a certain portion of the initial cash deposit(Primary deposit) of an condition that the firm opens an account with the bank, in which the money loaned is deposited. This creates an additional deposit – a secondary deposit- with the bank. Once again the bank assumes that the firm will not withdraw all the cash at one time. Hence keeping aside a certain portion of this secondary deposit as reserve, the banks lends the remaining amount to yet another firm. This process continues and thereby, creates deposits which are much larger than the initial cash deposited by a person. This multiple creation of credit and deposit allows banks to charge interest on loans make a profit.
MONEY BANKING SYSTEM — CRR AND SLR
CRR stands for cash reserve ratio and SLR stands for statutory liquidity ratio. Let us understand with simplicity for better understanding.
Suppose what will happen when a bank motivated by greed, to set low proportion of its deposits as cash. Moreover, If, for some reason, a large number of depositors were to withdraw cash at the same time, the bank would be unable to pay up, leading to run on the bank. A higher possibility that banking system would collapse.
Reserve bank of India(RBI) is an apex bank of our country which regulates all the banks.
RBI sets some minimum limit on the cash reserve to be kept up by the bank against their deposit liabilities. This minimum limit, implemented by RBI, is called Cash reserve ratio which differs from 20 percent to 3 percent of the deposit liabilities of the bank.
Further, RBI was likewise worried that a disproportionate amount of loan must not be given to less creditworthy/risky borrowers. To make preparations for this, RBI orders that banks keep up certain extent of their deposit liabilities as secure investments like government securities/gold/Cash which is called Statutory liquidity ratio.
ICICI MONEY BANKING SYSTEM COLLAPSE RUMORS IN 2008
In September 2008, There was a rumor that ICICI bank would collapse because of its investments. Rumors spread across country. Some panic set in mind and depositors started withdrawing cash from many ATM’s in the country. Both RBI and ICICI had to come out with statements assuring the depositors that bank had sufficient liquidity.
Similarly in 2001, Financial troubles had caused a temporary run on some banks. Banks such as Kalupur commercial co-operative bank in Gujarat.
DEVELOPMENTS IN MONEY BANKING SYSTEM BY GOVERNMENT OF INDIA
The government felt that banks were not serving the priority sectors of the society. India could reach commanding heights through the nationalization of banks. Of course, Public sector banks have had challenges in terms of bureaucratization of administration, unionization and non performing assets. Government needed to give budgetary support. More over, there was resistance to computerization in public sector banks which delayed the much desired efficiency gains. Today, however, things are very different. The government has allowed up to 49% ownership of the public sector banks in private hands. Also, the competition by the private sector banks has driven public sector banks to become efficient.
I hope this article added value in your knowledge. I have written with a context, How money banking system evolved and took place in our daily lives. Once we started from barter system and reached investing in stock market. Now a days People are very conscious for their financial requirements and do financial planning for the same and even people who do not have much knowledge they do it with professional assistance for example- Mutual Fund. We have noticed a transition phase. Please do comment, if you have an additional information to be added with the context to this article, “Money banking system”.