13th Aug, 2021

Functions of Bank

Primary Functions of Banks

The primary functions of a bank are also known as banking functions. They are the main functions of a bank.

These primary functions of banks are explained below.

1. Accepting Deposits

The bank collects deposits from the public. These deposits can be of different types, such as:-

Saving Deposits

• This type of deposits encourages saving habit among the public.
• The rate of interest is low. At present it is about 4% p.a. Withdrawals of deposits are allowed subject to certain restrictions.
• This account is suitable to salary and wage earners. This account can be opened in single name or in joint names.

Fixed Deposits

• Lump sum amount is deposited at one time for a specific period. Higher rate of interest is paid, which varies with the period of deposit.
• Withdrawals are not allowed before the expiry of the period. Those who have surplus funds go for fixed deposit.

Current Deposits

• This type of account is operated by businessmen. Withdrawals are freely allowed. No interest is paid.
• In fact, there are service charges. The account holders can get the benefit of overdraft facility.

Recurring Deposits

• This type of account is operated by salaried persons and petty traders.
• A certain sum of money is periodically deposited into the bank.
• Withdrawals are permitted only after the expiry of certain period. A higher rate of interest is paid.

2. Granting of Loans and Advances

The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits. The difference in the interest rates (lending rate and the deposit rate) is its profit.

The types of bank loans and advances are:-

Secondary functions of the bank

In addition to the primary functions of accepting deposits and lending money, banks perform a number of other functions, which are called secondary functions. These are as follows:

1. Issuing letters of credit, travelers cheque, etc.
2. Undertaking safe custody of valuables, important document and securities by providing safe deposit vaults or lockers.
3. Providing customers with facilities of foreign exchange dealings.
4. Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft.
5. Standing guarantee on behalf of its customers, for making payment for purchase of goods, machinery, vehicles etc.
6. Collecting and supplying business information.
7. Providing reports on the credit worthiness of customers.
8. Providing consumer finance for individuals by way of loans on easy terms for purchase of consumer durables like televisions, refrigerators, etc.
9. Educational loans to students at reasonable rate of interest for higher studies, especially for professional courses.

Types of Banks

• There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc.
• On the basis of functions, the banking institutions in India may be divided into the following types:

Central Bank

• A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank.
• Such a bank does not deal with the general public. It acts essentially as Government’s banker; maintain deposit accounts of all other banks and advances money to other banks, when needed.
• The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the banker’s bank.
• The Reserve Bank of India is the central bank of our country. The Central Bank maintains record of Government revenue and expenditure under various heads.
• It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans.
• In addition, foreign exchange rates are also determined by the central bank. Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. No other bank than the Central Bank can issue currency.

Commercial Banks

• Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers.
• In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises.
• Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals.

Types of Commercial banks

Commercial banks are of three types i.e., Public sector banks, Private sector banks and Foreign banks.

1. Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc.
2. Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Vysya Bank, etc.
3. Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

Development Banks

• Business often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization.
• Such financial assistance is provided by Development Banks.
• They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public.
• Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.

Co-operative Banks

• People who come together to jointly serve their common interest often form a co-operative society under the Co-operative Societies Act.
• When a co-operative society engages itself in banking business it is called a Co-operative Bank.
• The society has to obtain a license from the Reserve Bank of India before starting banking business.
• Any co-operative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of the State.
• As regards banking business, the society must follow the guidelines set and issued by the Reserve Bank of India.

Types of Co-operative Banks

There are three types of cooperative banks operating in our country. They are primary credit societies, central co-operative banks, and state co-operative banks. These banks are organized at three levels, village or town level, district level, and state level.

(i) Primary Credit Societies: These are formed at the village or town level with the borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent fraud.

(ii) Central Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state cooperative banks.

(iii) State Co-operative Banks: These are the apex (highest level) cooperative banks in all the states of the country. They mobilize funds and help in its proper channelization among various sectors. The money reaches the individual borrowers from the state cooperative banks through the central cooperative banks and the primary credit societies.

Specialized Banks

• There are some banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity.
• EXIM Bank, SIDBI and NABARD are examples of such banks.
• They engage themselves in some specific area or activity and thus, are called specialized banks.

1. Export Import Bank of India (EXIM Bank): If you want to set up a business for exporting products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you the required support and assistance. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc.
2. Small Industries Development Bank of India (SIDBI): If you want to establish a small-scale business unit or industry, loan on easy terms can be available through SIDBI. It also finances modernisation of small-scale industrial units, use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop small-scale industries.
3. National Bank for Agricultural and Rural Development (NABARD): It is a central or apex institution for financing agricultural and rural sectors. If a person is engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage and village industries handicrafts and allied economic activities in rural areas.

Reserve Bank of India

• The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
• The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
• Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
• The Reserve Bank’s affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.
• The directors are appointed/nominated for a period of four years.
• RBI is a statutory body. It is responsible for printing of currency notes and managing the supply of money in the Indian economy.

Functions of Reserve Bank

Issue of Notes

• The Reserve Bank has the monopoly for printing the currency notes in the country.
• It has the sole right to issue currency notes of various denominations except one rupee note (which is issued by the Ministry of Finance).
• The Reserve Bank has adopted the Minimum Reserve System for issuing/printing the currency notes.

Banker to the Government

• The second important function of the Reserve Bank is to act as the Banker, Agent and Adviser to the Government of India and states.
• It performs all the banking functions of the State and Central Government and it also tenders useful advice to the government on matters related to economic and monetary policy.
• It also manages the public debt of the government.

Banker’s Bank

• The Reserve Bank performs the same functions for the other commercial banks as the other banks ordinarily perform for their customers.
• RBI lends money to all the commercial banks of the country. 

Controller of the Credit

• The RBI undertakes the responsibility of controlling credit created by the commercial banks.
• RBI uses two methods to control the extra flow of money in the economy. These methods are quantitative and qualitative techniques to control and regulate the credit flow in the country. 
• When RBI observes that the economy has sufficient money supply and it may cause inflationary situation in the country then it squeezes the money supply through its tight monetary policy and vice versa.

Custodian of Foreign Reserves

• For the purpose of keeping the foreign exchange rates stable, the Reserve Bank buys and sells the foreign currencies and also protects the country’s foreign exchange funds.
• RBI sells the foreign currency in the foreign exchange market when its supply decreases in the economy and vice-versa. Currently India has Foreign Exchange Reserve of around US$ 390bn.

Other Functions

• The Reserve Bank performs a number of other developmental works.
• These works include the function of clearing house arranging credit for agriculture (which has been transferred to NABARD) collecting and publishing the economic data, buying and selling of Government securities (gilt edge, treasury bills etc)and trade bills, giving loans to the Government buying and selling of valuable commodities etc.
• It also acts as the representative of Government in International Monetary Fund (I.M.F.) and represents the membership of India.

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India’s PM has addressed the UNSC open debate on the issue of Enhancing Maritime Security. In this article, we will discuss and analyse all aspects of this issue.

Maritime Security

• Maritime security is one of the latest buzzwords of international relations.
• Major actors in maritime policy, ocean governance and international security have in the past decade started to include maritime security in their mandate or reframed their work in such terms.
• Core dimensions of maritime security involves the concept of blue economy, food security and the resilience of coastal populations.
• A secure maritime environment provides the precondition for managing marine resources.

Dimensions of maritime security

Why it is significant?

• Maritime security is of utmost significance to the world community as there are maritime concerns ranging from piracy at sea to illegal immigration and weapon smuggling.
• It also deals with threats of terrorist attacks and environmental catastrophes.
• For India, maritime security is an important aspect of national security as it has a coastline of over 7,000 km.
• With advancement in technology, physical threats in the maritime region have now been overshadowed by technological threats.
• India’s exports and imports have remained mostly across the shipping lanes of the Indian Ocean.
• Therefore, securing Sea Lanes of Communication (SLOCs) have been an important issue for India in the 21st century.

Need for an agenda

• In today’s economy, the oceans have an increased importance, allowing all countries to participate in the global marketplace.
• More than 80 percent of the world’s trade travels by water and forges a global maritime link.
• About half the world’s trade by value, and 90 percent of the general cargo, are transported in containers.
• Many countries have invested significant resources in maritime infrastructure, trade, energy supply chains, cargo movements and processes.
• China, undeniably a continental country, claims sovereignty over all of the South China Sea islands and their adjacent waters.

5-point agenda for enhancing maritime cooperation

[1] Removal of barriers to legitimate maritime trade:

• Global prosperity depends on the active flow of maritime trade. Any hindrance in maritime trade can threaten the global economy, PM said.
• Maritime trade has always been part of the civilizational ethos of India.
• PM termed this principle as ‘SAGAR’ Security and Growth for All in the Region.

[2] Resolution of maritime disputes peacefully in accordance with international law:

• Citing the example of the resolution of India’s maritime dispute with Bangladesh, PM Modi said it is necessary for free maritime trade to fully respect the rights of seafarers of other countries.

[3] Fight threats from natural disasters, non-state actors:

• PM said the Indian Navy has been patrolling to counter piracy in the Indian Ocean since 2008.
• It is enhancing the common maritime domain awareness of the region through our White Shipping Information Fusion Centre.
• India has provided support for hydrographic surveying and training of maritime security personnel to several countries.

[4] Conservation of marine resources:

• Our oceans directly impact our climate. Hence, it is very important that we keep our maritime environment free of pollutants like plastic waste and oil spills.
• We also need to take joint steps against over-fishing and marine poaching, PM said.
• He also emphasized the need for increased mutual cooperation in Ocean Science research.

[5] Promoting responsible maritime connectivity:

• PM said it is well understood that the creation of infrastructure is necessary to boost maritime trade.
• He advocated for appropriate global norms and standards to ensure that such infrastructure projects are carried out as per the fiscal sustainability and absorption capacity of the host countries.

A veiled dig at China

• PM has indirectly cautioned that fiscal sustainability and absorption capacity of the countries have to be kept in mind in the development of such infrastructure projects.
• The wanton disregard shown by China towards established maritime norms and rule of law has been unprecedented in modern times.
• PM pointedly referred to “dangerous encounters between vessels at sea and provocative actions to advance unlawful maritime claims” in the South China Sea (SCS).
• India’s initiative is a wake-up call for everyone to recognize and address the real and imminent threat to our common maritime heritage.

If Beijing locates, dusts off and re-reads the provisions of UNCLOS, it would be a major step forward.

Outcome of the UNSC meet

• The meet was significant. Barring China, all others stressed the centrality of UNCLOS and international cooperation.
• India’s concept of SAGAR and its vison of Indo-Pacific is receiving greater acceptability. Nations accept that the objective should be development for all.
• The convergence of Russia and India is of great importance. While Russia is aware of the tension growing in the SCS, it is also concerned that none should disturb the strategic balance in the Arctic.
• China has to make a choice whether it wishes to act as a responsible and mature nation and accept the international laws or would continue to flout them.

Securing the Indian Ocean

• The Indian Ocean is the major gateway accounting for nearly 75 per cent of the world’s maritime trade and half of global oil consumption.
• Any threats to the free movement of ships on these oceans and unfair practices have an impact on the global economy.
• Therefore, regional trade relations based on internationally acceptable principles should be the way forward.

Way forward

• The onus is on India to expand its horizons to safeguard its strategic and economic interests.
• India’s legacy to the global policy basket could be advocacy for sustained focus on the maritime domain and the correlation with globalization, the blue economy, the health of the ocean and the overall impact on human security.
• Security and equitable growth for all by husbanding the global ocean for future generations is a laudable goal and encouraging the UNSC to prioritize this issue is a worthy cause.

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12th Aug, 2021

Inflation

• Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.
• It refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
• Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This is measured in percentage.
• Inflation can be viewed positively or negatively depending on the individual viewpoint. Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets. People holding cash may not like inflation, as it erodes the value of their cash holdings.
• Ideally, an optimum level of inflation is required to promote spending to a certain extent instead of saving, thereby nurturing economic growth.
• Inflation and economy is related in the following way:

• RBI takes the necessary measures to keep inflation within permissible limits and keep the economy running smoothly.

• Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.
• Deflation benefits consumers because they can purchase more goods and services with the same nominal income over time.
• Disinflation is a temporary slowing of the pace of price inflation. It is used to describe instances when the inflation rate has reduced marginally over the short term.
• Stagflation is the combination of high unemployment with high inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil prices led to low growth.

Who measures Inflation in India?

• Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of the economy.
• In India, the Ministry of Statistics and Programme Implementation measures inflation.

Types of Inflation

Depending upon the rate of growth of prices, inflation can be of the following types:

1. Creeping Inflation

Creeping or mild inflation is when prices rise 3% a year or less. This kind of mild inflation makes consumers expect that prices will keep going up. That boosts demand. Consumers buy now to beat higher future prices. That’s how mild inflation drives economic expansion.

2. Walking Inflation

This type of strong, or pernicious, inflation is between 3-10% a year. It is harmful to the economy because it heats up economic growth too fast. People start to buy more than they need, just to avoid tomorrow’s much higher prices. This drives demand even further so that suppliers can’t keep up. More important, neither can wages. As a result, common goods and services are priced out of the reach of most people.

3. Galloping Inflation

When inflation rises to 10% or more, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can’t keep up with costs and prices. Foreign investors avoid the country, depriving it of needed capital. The economy becomes unstable, and government leaders lose credibility. Galloping inflation must be prevented at all costs.

4. Hyperinflation

Hyperinflation is when prices skyrocket more than 50% a month. It is very rare. In fact, most examples of hyperinflation have occurred only when governments printed money to pay for wars. Examples of hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and Venezuela in the 2010s. The last time America experienced hyperinflation was during its civil war.

5. Core Inflation

The core inflation rate measures rising prices in everything except food and energy. That’s because gas prices tend to escalate now and then. Higher gas costs increase the price of food and anything else that has large transportation costs.

Causes of Inflation

• In any economy, generally two sets of factors result in inflation — Demand-pull factors and Cost-push factors.

• Demand-pull factors may be those due to which there is an increase in the demand for goods and services in general leading to rising prices.
• On the other hand, cost-push factors are those due to which there may be shortfall in supply of goods/services and/or rise in the cost of production of goods/services.
• At any given point of time, inflation is attributed to both sets of factors. Sometimes one may be more potent than the other.

Measures to Contain Inflation

RBI takes monetary measures while the Government takes fiscal measures to contain inflation.

Monetary Measures

• As part of the monetary policy review, the RBI takes suitable measures to moderate demand to levels consistent with the capacity of the economy to maintain its growth without provoking price rise.
• It is generally agreed that high rates of inflation is caused by an excessive growth of the money supply.
• The RBI controls the money supply by its monetary policy via which it alters the interest rates and alters the banking reserve requirements to bring the inflation in its comfort zone.
• The key policy rates are Repo Rate, Reverse Repo Rate, Marginal Standing Facility and the key banking reserve requirements are SLR and CRR.
• When these rates are altered, the movements are passed on other prevailing interest rates in the economy which ultimately influences the borrowing costs for firms and households.

For example, when the interest rates go down, it becomes cheaper to borrow, so households are more willing to buy goods and services and firms are in a better position to purchase items to expand their businesses, such as property and equipment.

Fiscal Measures

• The government can take the following Fiscal Measures to contain inflation:

1. Reducing Import Duties
2. Allowing imports of the commodities which are scarce in market.
3. Removing levy obligations in case of sugar
4. Banning exports of commodities such rice and oils.
5. Imposing minimum export prices.
6. Suspending or banning the futures trading is come commodities.
7. Raising the stock limit of some commodities.
8. Making available the commodities via various organizations such as NAFED and NCCF.

Measurement of Inflation

• There are several ways to measure inflation.
• On the basis of population coverage, the inflation indices are developed to understand the levels of inflation for certain sets of population such as consumers, producers, retailers, wholesalers etc. Such indices are called Consumer Price Index (CPI), Producer Price Index (PPI), and Wholesale Price Index (WPI) etc.
• On the basis of items, the inflation indices are developed to understand the levels of inflation for certain sets/baskets of items. Since the prices of some items are more volatile than others like food and fuel, it might give conflicting signals to policymakers as the overall inflation could change because of a selected few goods. Hence, separate indices can be developed separating the volatile items from the main index.  This gives rise to concepts of Headline inflation and core inflation whereby, the Headline inflation includes all the items and core inflation usually excludes food and fuel items.

Inflation Indices

In India, Consumer Price Index (CPI) and the Wholesale Price Index (WPI) are two major indices for measuring inflation. In the United States, CPI and PPI (Producer Price Index) are two major indices.

The Wholesale Price Index (WPI) was the main index for measurement of inflation in India till April 2014 when RBI adopted the new Consumer Price Index (CPI) (combined) as the key measure of inflation.

Wholesale Price Index

The wholesale Price Index (WPI) is computed by the Office of the Economic Adviser in the Ministry of Commerce & Industry, Government of India. It was earlier released on weekly basis for Primary Articles and Fuel Group. However, since 2012, this practice has been discontinued. Currently, WPI is released monthly.

Salient notes on WPI are as follows:

Base Year

The current WPI Base year is 2004-05=100. It’s worth note that the base year for CPI is 2012 currently. This is one reason for the increasing difference between CPI and WPI in recent times.

Consumer Price Index

Consumer Price Indices (CPI) released at the national level are:

1. CPI for Industrial Workers (IW)
2. CPI for Agricultural Laborers (AL)/ Rural Laborers (RL)
3. CPI (Rural/Urban/Combined)

While the first two are compiled and released by the Labor Bureau in the Ministry of Labor and Employment, the third is by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation.

In India, RBI uses CPI (combined) released by CSO for inflation purposes. Important notes on this index are as follows:

Base Year

The base year for CPI (Rural, Urban, and Combined) is 2012=100.

Key differences between WPI & CPI

• Primary use of WPI is to have inflationary trend in the economy as a whole. However, CPI is used for adjusting income and expenditure streams for changes in the cost of living.
• WPI is based on wholesale prices for primary articles, administered prices for fuel items and ex-factory prices for manufactured products. On the other hand, CPI is based on retail prices, which include all distribution costs and taxes.
• Prices for WPI are collected on voluntary basis while price data for CPI are collected by investigators by visiting markets.
• CPI covers only consumer goods and consumer services while WPI covers all goods including intermediate goods transacted in the economy.
• WPI weights primarily based on national accounts and enterprise survey data and CPI weights are derived from consumer expenditure survey data.

Index of Industrial Production (IIP)

• Index of Industrial Production data or IIP as it is commonly called is an index that tracks manufacturing activity in different sectors of an economy.
• The IIP number measures the industrial production for the period under review, usually a month, as against the reference period.
• IIP is a key economic indicator of the manufacturing sector of the economy.
• There is a lag of six weeks in the publication of the IIP index data after the reference month ends.
• IIP index is currently calculated using 2011-2012 as the base year.

IIP Index Components:

• Mining, manufacturing, and electricity are the three broad sectors in which IIP constituents fall.
• The relative weights of these three sectors are 77.6% (manufacturing), 14.4% (mining) and 8% (electricity).
• Electricity, crude oil, coal, cement, steel, refinery products, natural gas, and fertilizers are the eight core industries that comprise about 40 per cent of the weight of items included in the IIP.

Basket of products

There are 6 sub-categories:

1. Primary Goods (consisting of mining, electricity, fuels and fertilizers)
2. Capital Goods (e.g. machinery items)
3. Intermediate Goods (e.g. yarns, chemicals, semi-finished steel items, etc)
4. Infrastructure Goods (e.g. paints, cement, cables, bricks and tiles, rail materials, etc)
5. Consumer Durables (e.g. garments, telephones, passenger vehicles, etc)
6. Consumer Non-durables (e.g. food items, medicines, toiletries, etc)

Who releases IIP data?

• The IIP data is compiled and published by CSO every month.
• CSO or Central Statistical Organization operates under the Ministry of Statistics and Programme Implementation (MoSPI).
• The IIP index data, once released, is also available on the PIB website.

GDP Deflator

The most comprehensive measure is GDP deflator which is measured as the ratio of GDP (Gross Domestic Product) at current prices to GDP at constant prices. Since it encompasses the entire spectrum of economic activities including services, the scope and coverage of the national income deflator is wider than any other measure. This data is released by the Central Statistical Organization (CSO) but is not used as it comes quarterly and with a 2-month lag.

What is Inflation targeting?

• Inflation targeting involves using monetary policy to keep inflation close to the agreed target.
• RBI and Government of India signed a Monetary Policy Framework Agreement in February 2015.
• As per terms of the agreement, the objective of monetary policy framework would be primarily to maintain price stability (inflation targeting), while keeping in mind the objective of growth.
• According to the agreement, RBI would aim to contain consumer price inflation within 4% with a band of (+/-) 2% for all subsequent years.

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