Money, Banking & Credit

NODE 01

Barter System

↔

• Direct exchange of goods/services.
• Requires double coincidence of wants.
• Lacks common measure of value.
• Difficult to store/transfer wealth.

NODE 02

Money

• Generally accepted means of payment.
• Used for settling obligations.
• Modern money: Currency + Bank deposits.

NODE 03

Functions of Money

XCHG

UNIT

STOR

DEFR

• Medium of exchange (Goods → Money → Goods).
• Measure / unit of account (Prices).
• Store of value (Purchasing power).
• Standard of deferred payment (Loans).

NODE 04

Evolution of Money

→

→

→

• Barter → Commodity → Metallic.
• Coins → Paper Currency.
• Bank Deposits → Digital Payments.
• Solves problems of exchange/valuation.

NODE 05

Commodity Money

=

• Commodity accepted in exchange.
• E.g., cattle, salt, grain, shells.
• Has intrinsic value/use beyond monetary role.

NODE 06

Metallic Money

• Gold, silver, bronze used historically.
• Durable, divisible, portable, scarce.
• Coins standardized units of exchange.

NODE 07

Paper Money

₹500

• Portable, divisible, easy to transport.
• Less costly than commodity money.
• Value derives from legal/institutional acceptance.

NODE 08

Fiat Money

AUTH

• Has value because it is officially recognized.
• Not redeemable for a physical commodity (gold).
• The modern Rupee is fiat currency.

NODE 09

Money Supply

CASH

DEPOSITS

BROAD

• Stock of money available in an economy.
• Currency held by public + bank deposits.
• Different statistical measures exist.

NODE 10

Commercial Banks

→

→

• Accept deposits, provide loans.
• Facilitate payments and financial services.
• Savers → Bank Intermediation → Borrowers.

NODE 11

Bank Deposits

DEM

vs

TRM

• Demand deposits: Withdrawn on demand (highly liquid).
• Time/Term deposits: Kept for specific period.
• Term deposits generally earn higher interest.

NODE 12

Liquidity

CASH

PROP

• Ease of converting asset to means of payment.
• Without substantial loss of value.
• Cash = highly liquid. Property = less liquid.
• Banks must balance liquidity with profitability.

NODE 13

Credit

• Providing funds NOW for repayment LATER.
• Typically repaid with interest.
• E.g., Home loans, business loans, working capital.

NODE 14

Interest

%

• Payment associated with borrowing funds.
• Return received for lending/saving.
• Borrower pays, Lender receives.
• The "price" of borrowed money.

NODE 15

Financial Intermediary

• Banks connect Depositors (Savers) with Borrowers.
• Savings → Intermediation → Investment.
• Supports overall economic activity.

NODE 16

Credit Creation

• Commercial banks expand deposit money via lending.
• Receive deposits → hold reserves → lend portion.
• Loan spent → deposited → further lending.
• Constrained by capital, liquidity, and regulation.

NODE 17

Collateral

• Asset pledged to secure a loan.
• E.g., House (housing loan), Vehicle.
• Lender has rights over collateral if borrower defaults.

NODE 18

Secured vs Unsecured

SEC

vs

UNS

• Secured: Backed by specific collateral.
• Unsecured: No specific collateral pledged.
• E.g., personal loans, credit cards.

NODE 19

Formal vs Informal Credit

vs

• Formal: Regulated institutions (Banks, Co-ops).
• Informal: Unregulated (Moneylenders, traders).
• Informal may carry higher costs / weaker protections.

NODE 20

Rural Credit

• Crucial for agriculture & rural economies.
• Used for seeds, fertilizer, equipment, irrigation.
• Also used for consumption smoothing.

NODE 21

Central Bank (RBI)

• Institution responsible for monetary/financial functions.
• In India: Reserve Bank of India (RBI).
• Orchestrates the entire financial system.

NODE 22

Functions of RBI

CASH

BKRs

GOV

POL

REG

FX

• Monetary Authority & Currency Management.
• Banker to Govt & Banker to Banks.
• Regulation, Supervision, Foreign-exchange.
• Maintains financial stability.

NODE 23

Monetary Policy

• Use of monetary conditions to influence macro outcomes.
• Targets inflation and economic activity.
• Central Bank → Monetary Conditions → Aggregate Demand.

NODE 24

Policy Interest Rates

↕

• Influence broader interest-rate environment.
• Rate ↑ → Borrowing costs ↑ → Credit demand ↓ → Inflation pressure ↓.
• Rate ↓ works in opposite direction.

NODE 25

Repo Rate

• Key RBI policy rate.
• Liquidity provided to financial institutions against securities.
• Influences short-term cost of funds.

NODE 26

Liquidity Absorption

• Reverse Repo: Mechanisms to absorb liquidity.
• RBI takes funds from banks, provides securities.
• Influences overall liquidity conditions.

NODE 27

Cash Reserve Ratio (CRR)

CRR

• Proportion of bank liabilities maintained as CASH with RBI.
• Higher CRR reduces funds available for lending.
• Direct tool to control liquidity.

NODE 28

Statutory Liquidity Ratio

SLR

• Proportion of liabilities maintained in LIQUID ASSETS (bonds, gold).
• Governs bank liquidity and safety.

NODE 29

Open Market Operations

• RBI buying/selling govt securities to influence liquidity.
• Buy securities = Inject money.
• Sell securities = Absorb money.

NODE 30

Bank Rate

• RBI policy rate used for long-term lending.
• Distinct from Repo Rate (which is short-term).
• Plays role in monetary/regulatory framework.

NODE 31

Digital Payments

• Electronic transfer of funds.
• Examples: UPI, NEFT, RTGS, IMPS, Cards.
• Internet and mobile banking infrastructure.

NODE 32

UPI

UPI

• Unified Payments Interface.
• Instant bank-account-based payments.
• Major part of India's digital ecosystem.

NODE 33

NEFT

BATCH

• National Electronic Funds Transfer.
• Electronic system for transferring funds.
• Settled in batches.

NODE 34

RTGS

• Real Time Gross Settlement.
• Transactions settled individually in real-time.
• Crucial for high-value transfers.

NODE 35

IMPS

⚡

• Immediate Payment Service.
• Near-instant electronic funds transfer.
• Operates through participating banks.

NODE 36

Digital vs Crypto

VS

• Digital Money: Bank deposits transferred electronically.
• Cryptocurrency: Decentralized digital asset on ledger.
• CBDC (e₹): Digital form of central-bank fiat money.

NODE 37

Financial Inclusion

• Improving access to affordable financial services.
• Bank accounts, savings, credit, insurance, pensions.
• Connects banking with broad economic development.

NODE 38

Banking & Growth

• Moves funds toward productive uses.
• Savings → Intermediation → Credit → Production.
• Quality of allocation matters for growth vs risk.

NODE 39

Financial Risks

CRD

LIQ

MKT

OPR

• Credit Risk: Borrower default.
• Liquidity Risk: Insufficient liquid funds.
• Market Risk: Asset values/rates move adversely.
• Operational Risk: System/process failures.

NODE 40

Non-Performing Assets

• Loan that stops generating income for lender.
• Reduces profitability, weakens balance sheets.
• Limits new lending and creates systemic concerns.

NODE 41

Banking Regulation

• Banks hold public deposits & create credit.
• Operate payment systems, heavily interconnected.
• Regulation ensures financial stability.

NODE 42

Money & Inflation

• Excess demand relative to capacity → Inflation.
• Money → Credit → Spending → Prices.
• Direct bridge to Macroeconomic policy.

NODE 43

Money & Interest Rates

% ↑ →

• Influence borrowing, saving, investment.
• Rate ↑ → borrowing becomes more expensive.
• Impact depends on economic conditions.

NODE 44

Money & Circular Flow

• Allows income/expenditure to circulate.
• Households ↔ Firms ↔ Banks ↔ Government.
• Connects directly with National Income concepts.

NODE 45

Purchasing Power

vs

• Amount of money ≠ Amount of purchasing power.
• Depends on the overall price level.
• Inflation ↑ → Purchasing power of a unit ↓.

NODE 46

The Master Chain

• Barter → Money → Bank Deposits → Credit.
• Credit → Investment → Production.
• RBI → Monetary Policy → Liquidity/Rates.
• Influences overall Economic Activity & Inflation.