ISC Class 12 Economics - Chapter 14: Banks

Flashcards covering the definitions, functions, and credit control mechanisms for Commercial and Central Banks according to the ISC Class 12 Economics curriculum.

Bank

A financial institution that accepts deposits from the public, pays interest on them, and uses those funds to provide loans to others at a higher interest rate.

Bank Net Income Formula

$$\text{Interest on Loans} - \text{Interest paid on Deposits}$$

Central Bank

The apex monetary institution of a country that prints currency, manages monetary policy, and acts as the bank for the government and commercial banks; known as RBI in India.

Reserve Bank of India (RBI)

The Central Bank of India established in 1935 and nationalized in 1949, headquartered in Mumbai.

Commercial Banks

Institutions whose primary objective is to earn profit by providing banking services, accepting deposits, and advancing loans (e.g., SBI, HDFC, ICICI).

Development Banks

Banks that provide long-term finance to specific sectors of the economy, such as NABARD for agriculture or SIDBI for small industries.

Co-operative Banks

Banks organized as co-operative societies that primarily provide loans to farmers and small businesses.

Specialized Banks

Banks established for specific purposes, such as the Export-Import Bank (EXIM Bank) for international trade finance.

Current Account

A business-oriented deposit account that pays 0% interest but offers unlimited withdrawals and overdraft facilities.

Savings Account

An account for individuals offering limited withdrawals and a lower interest rate (typically 3-4%).

Fixed Deposit (FD)

An account where money is deposited for a fixed duration, offering the highest interest rates (6-8%).

Recurring Deposit (RD)

A monthly deposit scheme designed to develop saving habits, offering interest slightly lower than a Fixed Deposit.

Overdraft

A short-term loan facility allowing Current Account holders to withdraw more money than is available in their account.

Cash Credit

A credit limit granted to businesses for working capital needs, allowing them to withdraw funds as required up to a set limit.

Discounting Bills of Exchange

A service where the bank pays a customer the value of a future bill immediately after deducting a small commission fee.

Agency Functions

Services where the bank acts as an agent for the customer, such as collecting cheques, paying utility bills, or buying and selling shares.

General Utility Functions

Extra services provided by banks including locker facilities, Traveller's Cheques, and foreign exchange services.

Credit Creation

The unique process by which commercial banks create credit (money) several times the amount of their initial deposits.

Cash Reserve Ratio (CRR)

The specific percentage of total deposits that commercial banks must keep as a reserve with the Central Bank (RBI).

Credit Multiplier Formula

$$Credit Multiplier = \frac{1}{Cash Reserve Ratio (CRR)}$$

Total Credit Created Formula

$$\text{Initial Deposit} \times \text{Credit Multiplier}$$

Capital Formation

A role of commercial banks in the economy where they mobilize small savings and channel them into investments for business growth.

Monopoly of Note Issue

The exclusive right of the RBI to print currency notes in India (excluding the one-rupee note).

Lender of Last Resort

The function of the Central Bank to provide emergency loans to commercial banks facing financial crises to maintain public confidence.

Custodian of Foreign Exchange

The role of the RBI in managing and maintaining the country's reserves of foreign currencies like the Dollar, Pound, and Euro.

Clearing House Function

The settlement of inter-bank cheque payments by the RBI through book entries, avoiding physical transfer of cash.

Quantitative Methods of Credit Control

General tools used by the RBI to regulate the total volume of credit in the economy, including Bank Rate, CRR, and SLR.

Qualitative Methods of Credit Control

Selective tools used by the RBI to control the direction or purpose of credit, including Margin Requirements and moral suasion.

Bank Rate

The interest rate at which the Central Bank (RBI) lends long-term funds to commercial banks.

Open Market Operations (OMO)

The buying and selling of government securities in the open market by the RBI to regulate money supply.

Statutory Liquidity Ratio (SLR)

The fixed percentage of deposits that banks must maintain within themselves in the form of liquid assets like cash, gold, or government securities.

Repo Rate

The rate at which the RBI lends short-term money to commercial banks against government securities.

Reverse Repo Rate

The interest rate at which the RBI borrows money or accepts deposits from commercial banks.

Margin Requirement

The difference between the market value of the security (collateral) and the actual loan amount granted.

Moral Suasion

A qualitative method where the RBI uses persuasion, requests, or informal guidelines to influence commercial bank lending behavior.