CHAPTER 1: MONEY AND BANKING

 MONEY AND BANKING

(EXERCISES)

A. Fill in the blanks:

i. ---------------------------issues currency notes on behalf of the Central Government.
Answer: Central Bank.

ii. Banks charge a higher interest rate on loans than what they offer on --------------------
Answer: Deposits.

iii. ----------------------- is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.
Answer: Collateral.

iv. A ------------------------- is the simplest form of bank account which can be opened by any individual for encouraging savings.
Answer: Saving Bank Account. 

v. The most common form of payments being made instead of cash is a bank instrument called a ----------------.

Answer: Cheque.

vi. This is also called a "remotely created check,----------------------.
Answer: Demand Draft.

B. One word Answers: 

i. The central bank of India, ………………………
Answer: Reserve Bank of India (RBI).

ii. One nationalized Bank of India , ……………………………
Answer: Jammu & Kashmir Bank.

iii. One privately owned bank in India ,………………………….
Answer: HDFC Bank (Housing Development Finance Corporation Limited)

iv. One post office savings scheme, …………………………..….
Answer: Post Office Savings Account.

v. One cooperative bank in rural India giving loans to farmers……………………………...
Answer: Axis Bank.

C. Very short  Answer Type Questions 

1. What is double coincidence of wants? Explain with an example of your own?
Answer: Double coincidence of wants occurs when two individuals swap their goods, in exchange of one another. This is also known as the 'Perfect Barter Exchange". For Example Shoe maker and Farmer can exchange their goods as farmer needs shoes whereas shoe maker needs some wheat or rice.

2. Can you think of some examples of goods/services being exchanged or wages being paid through barter?
Answer: Yes in many parts of our country and world animals and crops are exchanged for services or goods. In most parts of rural India, barbers cut hair and in exchange get rice, wheat or any other crop.

2. Why is money called a medium of exchange?
Answer: Because money is the most common medium of exchange acceptable to all. It also eliminates the need for double coincidence of want.

3. What are the different forms of modern currency?
Answer: The different forms modern currency are Paper Currency, Demand Deposits, Plastic Money (Debit Card, Credit Cards)

4. Who is authorized to issue currency in India.
Answer: In India Reserve Bank of India (RBI) is authorized to issue currency.

5. Why can no one refuse to accept payment in rupees?
Answer: Because in India rupees are issued by RBI on behalf of the government of India.

6. Why are the deposits in the bank account called deposits?
Answer: Because the deposits in the bank account remain safe and can be withdrawn at any time by depositor.

7. How do banks mediate between those who have surplus money and those who need money?
Answer: the people deposit their surplus funds with the banks and Banks besides providing security ,pay interest to the depositors. The Bank keeps only a small portion of their deposits as cash with themselves. The balance of deposits is lent out to those who are in need of money.

8. Define a Cheque .
Answer: A Cheque is a paper instructing the bank to pay a specific amount from the persons account to the person in whose name the cheque has been issued. The maker of a cheque is called the 'drawer', and the person directed to pay is the 'drawee'.

9. Define a Loan.
Answer: Credit (Loan) facility refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.

10. Why do lenders ask for collateral while lending?
Answer: Lenders demand collateral security against loans and is kept with the lender/bank as a gurantee till the loan is repaid in full. If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain payment.

D. Long Answer Type Questions

1. What are the various forms of modern money?
Answer: The modern forms of money include Currency, Demand Deposits , Plastic money (Debit cards, Credit cards).

Currency: Paper money at present has occupied very important place in the monetary system of all countries. The paper money is used to refer to the government notes i.e. note issued by the central bank of a country. 

Deposits with banks: When we need only certain amount of money for our day to day needs , we need to keep our extra cash at a safe place. This means that apart from our currency as a form of holding money, the other form in which people hold money can be as deposits with banks. 

Plastic money: The use of Plastic money has started and found world wide acceptance. Plastic refers to the hard plastic cards which we use everyday in place of actual bank notes. They can come in many different forms such as cash cards, credit cards, debit cards, prepaid cash cards and store cards. 

2. What is the procedure of opening a Savings Bank account?
Answer: Following steps can be considered while opening bank account:

1. Choose a bank: This step involves choosing or selecting a bank with which a person wants to open an account. Presently we have many banks operational in our state Jammu and Kashmir.

2. Fill up the prescribed application form: Everyy bank has a prescribed application form to be filled up for opening an account. The application involves information regarding name, residence and space for fixing a photograph.

3. Submit the form: The filled up application form is to be submitted to the bank officer. It must be kept in mind that the bank may ask for necessary relevant documents like proof of residence, proof of identity. After scrutiny of the same the bank may issue an account number.

4. Receive necessary documents from the bank: After completion and successful submission of the form, the bank issues an account number passbook which contains particulars of the account holder. The passbook serves as an important documentary link between bank and account holder. The Bank may also issue ATM Card.

3. How can you withdraw money from a Savings Bank account?
Answer: The cash can be withdrawn by two procedures: 

I. By visiting the branch 

(a) By filling withdrawal form: The person has to present himself personally and fill up the withdrawal form. The bank official will identify the person through passbook, photograph and Signature on withdrawl form. 

(b) By Cheque: The cheques can be signed and issued by the account holder on the concerned bank. The bank will issue cash against such cheque. The account holder can himself also withdraw cash through such cheque. 

II. By using ATM (Automated Teller Machine): It is a machine controlled procedure. A person, can withdraw cash by inserting in ATM and following few steps. The machine, after inserting the card, will ask for pin (electronic key) to proceed. After that the machine will ask for options like amount to be drawn etc. At the end of transaction the machine will provide slip showing amount withdrawn and balance remaining with the bank.

4. What are the various forms of Plastic money ?
Answer: Plastic Money come in many different forms such as cash cards, credit cards, debit cards, prepaid cash cards and store cards. The most common are:

I. A Debit card: also known as a bank card is a plastic card that provides the cardholder electronic access to his or her bank account . The card, where accepted, can be used instead of cash when making purchases. Mostly the debit card is used for ATM (automated teller machine) transactions.

II. A Credit Card: allows the cardholder to pay for goods and services based on the holder's promise to pay for them. The issuer of the card creates a revolving account and grants a limit of credit to the consumer from which the user can borrow money for payment to a seller as a cash advance to the user. 

5. Explain the various credit and loan activities of Banks with an example? 
Answer: Banks advances loans against some approved security (collateral). This credit (Loan) facility refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. It serves two purposes 

Banks work as intermediaries between those who have surplus money (depositors) and those people who are in need of money (borrowers). 

Banks Charge higher Interest on the loans as compared to the interest paid to the deposit The difference between two rates is the bank’s profit.

For example. Rasheed has taken a loan of Rs 5 lakhs from the bank to purchase his dream house. The annual interest rate on the loan is 12 per cent and the loan is to be repaid in 10 years in monthly instalments. Rasheed had to submit to the bank, documents showing his employment records and salary before the bank agreed to give him the loan. The bank retained as collateral the papers of the new house, which will be returned to Rasheed only when he repays the entire loan with interest. So with the help of loan credit from the Bank , Rasheed has fulfilled his dream of owning a house of his own.