Académique Documents
Professionnel Documents
Culture Documents
Meaning of Money:
Money may be anything chosen by common consent as a medium of exchange. Other say, anything that performs the functions of money is money. Money is what money does. It is given and received irrespective of the standing of the person who offers it in payment. All commodities are expressed and valued in terms of money. In wider sense, the term money includes all medium of exchangegold silver, copper, paper cheques, commercial bills of exchange etc., This definition is too wide. Therefore, some writers offered the narrow definition that is, anything that is generally accepted as a means of exchange and that at the same time, acts as a measure and as a store of value.
General Economics
8. 1
Definitions of Money:
Money as a concept is defined by various writers in different ways. Some important views about money are as follows: In the words of Prof. Colborn It is the means of valuation and of payment as both the unit of account and the generally acceptable medium of exchange. Robertson defined money as anything which is widely accepted in payment for goods, or in discharge of other kinds of business obligations. In the words of G.D. H. Cole, Money is anything that is habitually and widely used as a means of payments and is generally acceptable in the settlement of debts. According to Kent, money is anything which is commonly used and generally accepted as a medium of exchange or as a standard of value. With the study of above definitions it can be concluded that money is the medium of exchange, measure of value, store of value and transfer of value. Money is classified as (i) Fiat Money and (ii) Fiduciary money. Fiat money, also known as currency is a legal tender. It has legal power to discharge debts. The creditor cannot refuse it. Fiduciary money is the demand deposits are the demand deposits of the bank. It is accepted as money on the basis of the trust that their issues command. A person can refuse to accept bank money (cheque), because there is no guarantee that the cheque will be honoured. In India, coins and paper money constitute supply and are known together as currency. To modern economists or empiricists, money includes the following functions: 1. Currencies and demand deposits of banks 2. Financial assets such as bonds, government securities and equity shares 3. Time deposits with banks Above categories of money some economist categories as 1. Near money includes as financial assets 2. Pure Money includes as cash and chequable with commercial banks In modern sense, financial assets are also considered as money on the following criteria: 1. Stability of the demand function, 2. High degree of substitutability, and 3. Feasibility of measuring statistical variations. Classification of Money: Money can be classified on the basis of relationship between the value of money as money and the value of money a commodity. 1. Full-bodied Money 2. Representative full bodied Money 3. Credit Money 1. Full-bodied Money: The money, whose value as a commodity for non-monetary purposes is as great as its value as money is known as full-bodied money. Gold coins in gold standard, silver coins in silver standard or gold and silver coins in bimetallic standard were the examples of full-bodied money. In the metallic standard the precious metal like gold and silver was wasted by the process of gradual depreciation, so full bodied money was replaced by representative full-bodied money. General Economics 8. 2 Money And Banking.
2. Representative Full-bodied Money: Instead of actual metallic coins paper money is used. Though its non-monetary value is negligible but it represents in circulation an amount of money with a commodity value equal to the value of money. The money which has higher face value than its intrinsic value is known as representative Full bodied Money. The paper money is lighter, easy to carry, convenient to use and also avoids wastage of precious metal as depreciation. 3. Credit Money: The money whose money value is greater than the commodity value of the material from which the money is made is known as credit money. It can be in the forms of token coins, representative token money, circulating promissory notes, issued by central government and deposit at banks. Forms of Credit Money: 1. Token coins: Metallic coins of the value of 5 paise, 10 paise, 20 paise Re.1 Rs. 2 and Rs. 5 circulating in the country are token coins. The value of these coins as money is far above the value of the metal contained in them. 2. Representative token money: It is usually made of paper. It is just like a circulating warehouse receipt for token coins or an equivalent amount of bullion, which is backing it. Here, also the value of money as money is greater than the value of money as a commodity or the bullion if it is made of metal. 3. Circulating promissory notes issued by central Bank: These are the currency notes issued by Reserve Bank in India. These notes are worth Rs. 1,000, Rs. 500 Rs. 100, Rs. 50 Rs. 20 Rs. 10 Rs. 5 and Rs. 2. On these notes we find. I promise to pay the bearer the sum of Rs written and signed by the Go vernor, Reserve Bank of India. These notes are simply circulating promissory notes signed by governor, Reserve Bank of India. 4. Deposits at banks: Deposits are claims of creditors (depositors) against bank. These deposits can be transferred from one person to another through the cheques.
General Economics
8. 3
The special feature of Indian Monetary System is that it has adopted Minimum Reserve System. Paper Currency is not convertible into precious metal (gold) that is backing it. Thus, currency is said to be inconvertible.
Functions of Money:
Money plays a very important role in an economy due to its various functions. The following the various functions of money. The functions of money can be studied under the following headings: 1) Primary Functions, 2) Secondary Functions 3) Contingent Functions.
place, realize the proceeds in money and purchase the other necessary goods and services at other place from this money.
General Economics
8. 5
5. Importance of money is production: In production process entrepreneur has to compensate all factors of production for their contribution for which he pays rent to land, wages to labour, interest to capital and profit to enterprise. Without money we cannot assess the exact compensation of factors of production.
Money Supply:
Money supply or supply of money means total amount of money available in an economy. In other words, Money supply refers to the volume of money held by the people in the country for transactions or for settlement of debts. In an economy, production consumption and capital formation (i.e. investment) are the continuing process. These transactions (i.e. sale and purchase of goods and services) depend upon money. The buyer gives money to shopkeeper for getting goods to satisfy his wants and shopkeeper uses this money to purchase other goods which are required by him. In this process of transaction, amount of money is the economy remains stables with the flow of money from one hand to another hand. Therefore, the supply of money of a country at any point of time is the total amount of money is circulation or in existence. Definitions of money supply: According to Gurby and Shaw money supply includes supply of money plus deposits of the banks, building societies, loan associations and deposits of other credit and financial institutions. In real practice the deposits of non-bank financial institutions are not included in the definitions of supply of money. According to Keynes, Money to be supplied is defined as the currency with the public and demand deposits with the commercial banks. Demand deposits are current account of the depositors. Depositors can withdraw this amount through cheque at any time. Demand deposits with the commercial banks plus currency with the public are together denoted as M1 and the supply of money. Milton Friedman defines the money supply at any time refers to literally the number of dollars (currency units) people are carrying around in their credit at banks in the form of demand deposits and also commercial bank time deposits. Factors Determining or Affecting or Influencing money supply: General Economics 8. 6 Money And Banking.
Modernization increases the money supply for the satisfaction of production and consumption needs, because people want more money to fulfill their increasing needs and wants. Following factors are also responsible for change in money supply. 1. Central bank: Central bank is the first determinant of supply of money, because central bank is responsibilities to issue currency notes in the country. So, it may increase or decrease supply of money. 2. Commercial bank: Commercial bank of a country also affects the money supply. Amount deposited by the public may or may not be tended by the commercial banks. If commercial banks keep more amount within the bank, the supply of money will be less and vice-versa. 3. Government: Government is also responsible to make change in money supply, because government decrease money supply with the increase in public revenue charged in the form of taxes under its fiscal policy. On the other hand, if government increases its expenditure by providing more salary to its employees, the money supply will increase. 4. Volume of trade: Volume of trade (i.e. volume of sale and purchase of goods and services) also affects the money supply. An increase in the volume of trade necessitates a large of money and viceversa. 5. Balance of payment: The change in the foreign assets also changes the money supply. The foreign exchanges are available in the country to pay for imports. This will increase the money supply in the country. In order to meet this adverse balance of payment, the country will have to dispose off some of its foreign assets. There will be less money supply in the country. 6. Velocity of circulation of money: If the velocity of circulation of money increase, the money supply also increase and the decrease in velocity of circulation of money decrease the money supply. 7. High price level: A high level price level of goods and services necessitates a larger supply of money of recover payment of goods and services. If the price level of commodities is lower, supply of money will also be less due to fewer requirements. 8. Distribution of national income: If the distribution of national income will be unequal (i.e. high gap between have and have not) money supply requirement will be more and vice-versa. 9. Banking habits of people: This influences the currency component of money supply. Whether the currency component of money will be high or low depends upon the banking habits of the public people would prefer to conduct the transactions through cheques rather than coins and notes. Thus, we find that the supply of money varies directly with the changes in the monetary base and inversely with the currency and required reserve ratio. 10. Amount of demand deposits:
General Economics
8. 7
Demand deposits mean the things available in place of money as a medium of exchange. High availability of demand deposits decreases the money supply and less availability of demand deposits increases the money supply.
Commercial Banks:
Commercial Banks: A commercial bank is an institution that operates for profit. It accepts deposits from the general public and extends loans to the households, firms and the government. Though borrowing and lending constitute the main business of banks, Commercial banks perform a variety of functions. Examples of commercial banks are Punjab National Bank and State Bank of India.
General Economics
8. 8
The functions of a bank can be summarized as follows: 1. Receipt of deposits: The most important function of a bank is to accept deposits from the public (individual, firms and institutions). Such deposits may be different types: a. Demand or current deposits: It includes current deposits and savings deposits. Deposits which are withdrawable on demand are called demand deposits. b. Time deposits: Deposits withdrawable after the expiry of fixed time period called fixed deposits. Interest paid by banks is highest for fixed deposits and lowest or even nil for current deposits. 2. Lending of money: Banks lend money mainly for industrial and commercial purposes. This lending may take the different form like a. Cash credits b. Overdrafts c. Loans and advances d. Discounting of bills of exchange Interest charged by banks on such lending varies according to the amount and period involved, social prioritynature of security offered the standing of the borrower etc. 3. Agency Services: A bank renders various services to consumers as an agent, such as a. Collection of bills, promissory notes and cheques b. Collection of dividends, interests, premiums, etc., c. Purchases and sale of shares and securities d. Acting as trustee or executor when so nominated e. Making regular payments such as insurance premiums etc., 4. General services: A modern bank performs following general services to the publica. Issue of letters of credit, travelers cheques, bank drafts, circular notes b. Safe keeping of valuables in safe deposit vaults (Lockers) c. Supplying trade information and statistics d. Conducting economic surveys e. Preparation of feasibility studies, project reports etc., f. Underwriting of shares and make loans for long-term purposes
2. Urban-bias: Prior to nationalization, many commercial banks were in urban areas. But after nationalization more and more branches were opened in semi-urban and rural areas. This urban biased nature of commercial banks led to slow rate of growth in the rural areas. 3. Neglect of agriculture sector: There was a total neglect of the agricultural sector and its finance prior to nationalization of banks. The banks increasingly advanced finances to commerce and industry 70% in 1951 to 87% in 1968. Agriculture accounted only 2.2% of the total advances. 4. Violation of norms: Commercial banks often violated the norms and priorities laid down in the plans and granted loans to even those industries, which figured nowhere in the priority list. 5. Speculative activities: Private commercial banks earned large profits and indulged in speculative activities. They have given advances to hoarders and black marketers against high rates of interest. 6. Neglect of priority sectors: There was a complete neglect of agricultural sector, export and small-scale industries etc. In order to discipline the commercial banks so that they do not over look the national priorities, nationalization of banks was undertaken first in 1969 and then in 1980.
Objectives of nationalisation:
Objectives of nationalization were as follows: 1. Removal of control by a few hands. 2. Provision of adequate credit for agriculture and small industry and export. 3. Giving a professional bent to management. 4. Encouragement of a new class of entrepreneurs and 5. The provision of adequate training as well as terms of services for banks staff.
Nationalization Phase I:
The Imperial bank of India was rechristened as State Bank of India and it was nationalized in the ear 1955. The All-India Rural Credit Survey Committee recommended the merger of the State Associated Banks with the State Bank of India as its subsidiaries, so that the State Bank of India Group (i.e. the State Bank of India and the State Associated Banks) could become strong enough to carry out the social banking task successfully, In accordance with the recommendation of this Committee, the State Bank of India (Subsidiary Bank) Act was passed in September, 1959 for the merger of the following ten State Associated Banks were namely; 1. The State Bank of Indore, Indore. 2. The State Bank of Patiala, Patiala. 3. The State Bank of Rajasthan. 4. The State Bank of Bikaner, Bikaner. 5. The State Bank of Jaipur, Jaipur 6. The State Bank of Saurashtra, Bavanagar. 7. The State Bank of Travancore, Tiruvanthapuram 8. The State Banks of Hyderabad, Hyderabad. 9. The State Bank of Mysore, Bangalore. 10. The State Bank of Baroda, Vododara. General Economics 8. 10 Money And Banking.
In the course of the merger, the State Bank of Baroda and the State Bank of Rajasthan were would up so that only 8 state associated banks were merged with the State Bank of India as its subsidiaries. Of these 8 subsidiary banks, the State Bank of Bikaner and the State Bank of Jaipur were merged with each other and became one bank. So today, there are only seven state associated banks, which are connected with the State Bank of India as its subsidiaries/ the seven subsidiary banks of the State Bank of India are namely: 1. The State Bank of Bikaner and Jaipur. 2. The State Bank of Patiala. 3. The State Bank of Indore. 4. The State Bank of Saurashtra 5. The State Bank of Hyderabad. 6. The State Bank of Mysore 7. The State Bank of Travancore. Nationalization phase II: The Government of India nationalized 14 major Indian banks in the private sector having deposits of Rs. 50 Crores and over each as on the last Friday on June 1969 with effect from 19th July 1969. By nationalizing the major banks, the Government secured control over what Mrs. Indira Gandhi described as the commanding nation on July 19 were to expand bank credit to priority areas which have hitherto been somewhat neglected removal of control by a few, provision of a adequate credit for agriculture and small industry and export; giving a professional bent to management; encouragement of new classes of entrepreneurs; and the provision of adequate training as well as terms of service for bank staff still remain and well call for continuous efforts over a long time. Nationalization is necessary for the speedy achievement of these objectives. The 14 banks which were nationalized on 19-7-1969 are listed in table below:
Name of Bank of India Ltd Nationalization The Central Bank of India Ltd The Bank of India Ltd The Punjab National Bank Ltd The Bank of Baroda Ltd
The United Commercial Bank Ltd
After Nationalization The Central Bank if India The Bank of India The Punjab National Bank The Bank of Baroda
The United Commercial Bank
The Canara Bank The United Bank of India Ltd The Dena Bank Ltd The Union Bank of India Ltd The Allahabad Bank Ltd The Syndicate Bank Ltd The Indian Overseas Bank Ltd
The Canara Bank The United Bank of India The Dena Bank The Union Bank of India The Allahabad Bank The Syndicate Bank The Indian Overseas Bank
05-03-1907
16-09-1935
General Economics
8. 11
The Andhra Bank Ltd., Hyderabad The Corporation Bank Ltd., Udupi The New Bank of India Ltd., New Delhi The Oriental Bank of Commerce Ltd., New Delhi The Punjab and Sindh Bank Ltd., Amritsar The Vijaya Bank Ltd., Mangalore
The Andhra Bank The Corporation Bank The New Bank of India The Oriental Bank of Commerce The Punjab and Sindh Bank The vijaya Bank Ltd.
On 4th September, 1993 the Government merged the New Bank of India with Punjab National Bank and as a result of this the total number of nationalized banks got reduced to from 20 to 19. Progress of commercial Banks after Nationalisation (1969-2006):
After the nationalization of 14 banks in 1969 and 6 banks in 1982 following development have taken place 1. Expansion of branches: There has been a remarkable expansion of branches since nationalization. Compared to just 8262 branch offices in 1969, the number of branches in 2005 has increased to 68500. As a result, the population per bank office has reduced from 55,000 in 1969 to 16,000 in 2006. 2. Branch opening in rural and unbanked areas: Before nationalization, there was a clear urban bias in the operations of banks. But after nationalization they have started moving towards rural and semi urban areas. Compared to just 22% in 1969 bank branches in rural areas, has increased about 44% in June 2006. 3. Deposit mobilization: There has been a substantial rise in the rate of deposit mobilization since nationalization. The aggregate deposits of commercial banks have increased from Rs.4,665 crore in 1969 to around Rs.23,50,000 Crores in Dec 2006 forming almost 50% of the national income. In state-wise deposit mobilization, Maharashtra leads all other states and accounts for more than 1/5th of the aggregate deposits received by the banks. The states Delhi, U.P West Bengal Tamil Nadu, Karnataka and A.P account for 65% of the aggregate deposits. 4. Bank lending: There has been a great rise in the bank lending since nationalisation. It has gone up from Rs.3399 crore in June 1969 to more than Rs. 10,93,000 Crores in June 2006. The banks have taken special care of the priority sectors like agriculture, small scale industries and small retail trade accounted for about 15% of the commercial banks credit. This percentage has gone up to about 37.5% in March, 2006. 5. Promotion of new entrepreneurship: Banks also promote entrepreneurship with the schemes such as IRDP, TRYSEM, JRY, NRY etc.
General Economics
8. 12
The growth of branches in numerical terms is insufficient in India. This is specially so with regard to rural areas having less than 45% (exactly 44%) of the bank branches but 70% (69.3%) of the population residing there. 2. Regional imbalance: Only few states have well developed banking facilities. Assam, Bihar, Arunachal Pradesh and Madhya Pradesh, on an average have lesser number of banks compared to other states. Even from the states which are well banked like Maharashtra, West Bengal and Tamilnadu, if big metropolitan cities are excluded the population per excluded the population per bank office is larger than the average for these states. 3. Increasing overdues: As a result of increasing loans and advances to unemployed and weaker section, the commercial banks are facing the problem of bad debts, doubtful debts and overdues called Non Performing Assets (NPA). NPA were more than Rs. 45,000 Crores in 1997-98, Rs. 70,000 Crores in 2001-02 and Rs. 51,000 Crores in 2005-06. As a percentage of gross advances, they have fallen from 16% to 10.5% and further to 305% over the above period. 4. Lower efficiency: The quality of services rendered has deteriorated. This has happened because of staff indiscipline and absence of the system of accountability, problem of effective management and control. This has hampered the overall efficiency of the commercial banks. 5. Declining trends in profitability: The absolute profits of the banks are rising but the profitability ratio has been declining. Factors for declining trends in profitability are 1. Lower interest on Government borrowings from banks. 2. Subsidization of credit to priority sector. 3. Directed credit programmes of the Govt. 4. Lack of competition 5. Increasing expenditure-overstaffing and mushrooming of branches Profitability are declining due to increasing of non-performing assets (NPA), RBI has taken some steps to reduce NPAs. These include debt restructuring and recovery through Lok Adalats, civil courts and debt recovery tribunals. 6. Professional bent to management: The public sector banks have lack-expertise in merchant banking and agricultural financing areas. There is a need for professional touch in these areas. Important role of commercial banks after nationalization: To sum up, although after nationalization the commercial banks have played an important role in achieving national goals of the economy yet there is a need for: 1. Spreading their activities to the untouched remote areas. 2. Keeping up their profitability. 3. Looking after the growing needs of the priority sectors. 4. Improving the performance of rural/semi-urban branches. 5. Improving the quality of loan portfolio.
General Economics
8. 13
Reserve bank of India was set up in the year 1935 as the shareholders bank. RBI was nationalized in January 1949. The Reserve Bank of India (RBI) is the Central Bank of the country and it performs all the central banking functions. The central bank is the organ of government that undertakes the major financial institutions so as to support the economic policy of the government (Sayers). A central bank is to help control and stabilize the monetary and banking system. A central bank is a bank of bankers. Its duty is to control the monetary base and control of this high powered money to control the communitys supply of money (Samuelson). A Central Bank is one which constitutes the apex of the monetary and banking structure of the country and which performs, in the national economic interest, the following functions: 1. Issue of Currency: The RBI is the sole authority for the issue of currency in India other than one rupee coins and notes and subsidiary coins, the magnitude of which is relative small. The RBI is also called bank of issue. 2. Banker to the government: As a banker to the central and State Governments, the RBI performs the following functions. 1. It transacts all the banking business. It accepts money, makes payment and also carries out their exchange and remittances. 2. It manages public debt, advises the government on the quantum, timing and terms of new loans. 3. It also sells Treasury Bills to maintain liquidity in the economy 4. It makes advances which are repayable within 90 days 5. The RBI is the fiscal agent and adviser to the government in monetary and financial matters in India. It has a special responsibility in respect of financial policies and measures concerning new loans, agricultural finance and legislation affecting banking and credit and international finance 3. Bankers Bank: The RBI has extensive power to control and supervise commercial banking system under the RBI Act, 1934 and the banking Regulation Act, 1949 the scheduled banks are required to maintain a minimum of cash reserve ratio (CRR) with RBI. RBI controls the credit position of the country. The RBI provides financial assistance to scheduled banks and state cooperative banks. The RBI also conducts inspection of the commercial banks and calls for returns and other necessary information from banks. 4. Customs of Foreign Exchange Reserves: The RBI is the custodian of monetary reserve in India and RBI also is the custodian of national reserve of international currency. It has to ensure that normal short-term fluctuations do not affect the exchange rate. When foreign exchange reserves are inadequate for meeting balance of payments problem, it borrows from the IMF. The RBI has the authority to enter into exchange transactions on its own account and on account of government. It also administers exchange control of the country and enforces the provision of Foreign Exchange Management Act. 5. Controller of Credit: Credit control is generally considered to be the principal function of a central bank. By making frequent changes in monetary policy, it ensures that the monetary system in the General Economics 8. 14 Money And Banking.
economy functions according to the nations needs and goals. The RBI uses almost all quantitative and qualitative methods of credit controls. 6. Lender of the last resort: RBI is the official lender of the last resort. Lender of the last resort means Central Bank coming to the rescue of other banks in times of financial crises. Financial crises might arise due to improvement in lending operation and due to depression in the economy. 7. Central clearance, settlement and transfer of money: Central bank has a special position for conducting clearinghouse operations, inter-bank transfer of funds and settlement of accounts. Central bank also give facility for transfer of money at free of charge. 8. Promotional functions: RBI also performs a variety of developmental and promotional functions. It is responsible for promoting banking habits among people, mobilizing savings, development of the banking system, and provision of finance for agriculture, foreign trade and small-scale industries. But now these functions have been handed over to NABARD, EXIM Bank and SIDBI (State Industrial Development Bank of India) respectively. 9. Collection and publication of Data: It has also been entrusted with the task of collection and compilation of statistical information relating to banking and other financial sectors of the economy. 10. Others: The RBI is responsible for overall monetary policy in India like monetary stability, stability of domestic price levels, maintenance of the international value of the nations currency etc.,
Difference between Commercial and Central Bank: The following difference found between central bank and commercial banks.
S.No Commercial Bank 1 It is profit-seeking institutions 2 It allows interest on deposits from public 3 Its profits mainly from loans and advances 4 5 6 Central Bank Its objective is not to make profit It does not allow interest on deposits from public
Its profits mainly from Govt., securities, Loans and from public. Advances to Govt. and Commercial banks Commercial banks have largely Central banks deals with Govt., Central and State public dealing Bank and other financial institution It is part of State It is organ of the State Banks mobilize savings and Central Banks role is to ensure that the others bank channelise them into investments proper use conduct their business in national economic interest Functions of commercial banks Function of central banks are unique are different
2. Open market operations (OMO): OMO imply deliberate and direct sales and purchases of securities and bills in the open market by the Central Bank to control the volume of credit. If it wishes to control credit and inflation, then Central Bank sells securities in the open market. If Central Bank wishes expansion of credit at the time of deflation, then it purchases the securities. 3. Variable reserve requirements: The Central Bank also uses the method of variable reserve requirements to control credit. There are two types of reserves, which the commercial banks are generally required to maintain: 1. Cash Reserve Ratio (CRR) 2. Statutory Liquidity Ratio (SLR) Cash Reserve Ratio refers to that portion of total deposits, which a commercial bank has to keep with RBI in the form of cash reserves. Statutory Liquidity Ratio refers to that portion of total of deposits of a commercial bank, which it has to keep with itself in the form of liquid assets. If Central Bank wishes to control credit or discourage credit, it should increase CRR & SLR If it wants to encourage credit, it should decrease CRR & SLR. At present, CRR % and SLR is % for entire demand and time liabilities. Conclusions: During inflation, to control inflation and to discourage investment it is advisable to 1. Increase the bank rate. 2. Sale of securities in the open market. 3. Increase the CRR and SLR. During deflation, to control deflation and to encourage investment, it is advisable to 1. Decrease the bank rate. 2. Buying of securities in open market. 3. Decrease the CRR and SLR. But effect of increase in CRR or SLR will be reduced or nullified if Bank rate is reduced; so all things should be in the same direction.
General Economics
8. 17
3. Issue of directives: The Central Bank also uses directives in the form of oral, written statements, appeals, or warnings, to various commercial banks for credit control. 4. Rationing of credit: Rationing of credit is a selective method adopted by the Central Bank for controlling and regulating the purpose for which credit is granted or allocated by commercial banks. 5. Moral Suasion: Moral suasion is a psychological means and purely informal and milder form of selective credit control. In moral suasion central bank persuades and morally requires to the commercial banks to co-operate with the general monetary policy of credit control. 6. Direct Action: The Central Bank may take direct action against the erring commercial banks. It may refuse to rediscount their papers, and give excess credit, or it may charge a penal rate of interest over and above the Bank Rate, for the credit demanded beyond a prescribed limit By making frequent changes in monetary policy, The Central Bank ensures that the monetary system in the economy functions in the national economic interest.
General Economics
8. 18