IMPORTANCE OF PUBLIC EXPENDITURE

I n today dynamic world, the importantance of public expenditure increasing not only to maintain law and order but also for the growth, stability of the economy and weal fear of the state. The importance of the public expenditure is explained below.

Due to the increasing cost of new weapons, sophisticated tanks and guns, modernization of defense forces a large part of the total expenditure is needed. Since wage is under developed countries are low, a number of welfare schemes are under take by the government, such as free or subsidized health services, child welfare, welfare of the handicapped, subsidies on food and housing, special schemes for the unemployed, for scheduled castes and tribes as in Nepal etc. Population has been expanding fast in developing countries. The population theory of Malthus has been operating in such countries. A large amount has to be spent on child welfare, nutrition, social security measures, public health service, family planning programmers such as free supplies of contraceptives etc. A developing country need industrial development both in the private and public sectors cheeps credit to small-scale industries, supply of raw materials at concessional rates, expert subsidies, tax concessionals for industries in the backward regions, setting up of strategic industries in the public sector, etc has increased the importance of public expenditure. Illiteracy is rampant in developing countries so public expenditure an account of education, art, culture, scientific service and research has increased considerably.

Mega Bank To Open This Week

Mega Bank that acquired an operating licence from the Nepal Rastra Bank on Tuesday is all set to open doors to customers from this week. On Sunday, the NRB board had decided to provide the operating license to the bank.A senior official of Mega Bank said the bank is ready to start operations from this week. With Mega coming into the market, the total number of commercial banks will hit the 28 mark.Three other upcoming banks—Century, Commerze and Trust and Civil Bank—have also already received letters of intent from the central bank and they will also come to the market soon. However, another upcoming bank State Bank of Nepal, withdrew from the licencing process.Mega has Rs. 1.63 billion paid up capital and has 1,219 promoters. The new bank comes at a time when the banking system has gone through a severe liquidity crunch since the beginning of the second half of the last fiscal year. Bankers say that the situation has not improved although commercial banks saw a sudden rise of Rs. 37 billion in deposits in the last two months of the last fiscal.Mega’s chief executive officer Anil Shah told the Post that the bank could attract more deposits with its promoters representing 63 districts. “As we have a bigger capital base, we can also lend well,” he said.

KINDS OF MONEY

Kinds of money are also known as forms of money. Money can be classified into various parts.

In the days of human civilization, human society had used each and every commodity like, cattle and their bones and leathers, food grains etc as money. The commodity which used as money is called commodity money. The commodity money lakes the basic feature of good money such as uniformity, stability durability, and transportability. Money made from metal like gold, silver, copper, brass is called metallic money. This money possesses quality of good money. The metallic money is of following types.

The money made up of superior metals gold, silver etc with definite weight, value and purity is called standard or full body’s coins. The face value of such money is supposed to be equal to its intrinsic value. Its value does not fall when it is sold after melting. The money made of inferior metals like iron, copper, brass etc is called token or subsidiary money. The face value of token money is higher then the intrinsic value. Its real value disappears if it is melted. It holds nature of limited legal tender.

The money issued by the central bank or monetary authority of the country in the form of paper notes is called paper money. The paper money was first invented in china in 18^th century. Such money possesses higher face value than its intrinsic value. The paper money is widely used through the world.

Paper money that represents precious metals is known as representative paper money. They serve as a substitute of gold and silver to user. They hold cent percent reserve in the central bank or monetary authority of the country. It is difficult to issue money because all money should keep gold and silver reserve. It is also known as convertible paper money because; they can be converted into gold and silver easily in cash of need.The money issue by the central bank without cent percent gold and silver reserve is called flat money. Its face value is many time higher than the intrinsic value. It is issued by the state, so it has unlimited legal tender, but there is no legal provision to convert fiat money into gold and silver. Hence it is called non convertible paper money.

The credit institution issued by the banks and finance companies, whose acceptance not obligatory, are known as credit or bank money. Credit instrument such as cheque, credit cards, debit cards, promissory notes, bills of exchange, draft, latter of credit etc are the example of credit money. It is also known as optional or non legal tender money.

PUBLIC FINANCE

Public finance is a study of income and expenditure or receipt and payment of government. It deals the income raised through revenue and expenditure spend on the activities of the community and the terms ‘finance’ is money resource i.e. coins. But public is collected name for individual within an administrative territory and finance. On the other hand, it refers to income and expenditure. Thus public finance in this manner can be said the science of the income and expenditure of the government.

Different economists have defined public finance differently. Some of the definitions are given below.

According to prof. Dalton “public finance is one of those subjects that lie on the border lie between economics and politics. It is concerned with income and expenditure of public authorities and with the mutual adjustment of one another. The principal of public finance are the general principles, which may be laid down with regard to these matters.

According to Adam Smith “public finance is an investigation into the nature and principles of the state revenue and expenditure”

To sum up, public finance is the subject, which studies the income and expenditure of the government. In simpler manner, public finance embodies the study of collection of revenue and expenditure in the public interest for the welfare of the country.

VALUE OF MONEY

The value of money indicates purchasing power of money. It refers to the quality of goods and services that a unit of money can purchase unit of time. The purchasing power of money depends on the level of price of goods and services. Thus, it refers the buying and purchasing power of money. There is inverse relationship between the value of money and the price level. If price is high purchasing power of money is low. Similarly if price is low the purchasing power is high. There is positive relationship between value of money and its purchasing power. Higher the value of money, lower will be the purchasing power. Similarly, lower the value of money, lower will be the purchasing power. The relationship between the value of money and its purchasing power is exactly proportional. Thus, in consumption, the value of money refers to the money to command or buy the goods and services.

According to Benham, “The value of money means the purchasing power of a unit of currency in general.”

In the word of Crowther, “The value of money is that what it mill buy”

Fisher define the value of money a “The purchasing power of money is the reciprocal of the level of prices”

TYPES OF BANKS

Althow we broadly defined bank as an institution that accepts deposits and provides lones of various kinds, this defination does not capture the types and nature of various service and products that bank performs. It, therefore, should be make cliear what type of functions that a banks performs, what are the services and products that it can provide to the custumer and to what extent and area it can make financial teansactions. Based on the nature of the services, capital based and coverage of the area banks can be classified into following majour types.

CENTRAL BANK


The central bank is an apex institution to regulate, supervise and facilatate the overall banking system of the country. It servs as the bankers' bank and economic as well as financial advisor to the government. Every country has its own central bank like Nepal Rastra Bank, Reserve Bank of India, Federal Reserve Bank (USA) Bank of Japan etc. It is established for achiving some predetermine objectives such as maintaning price stability, promoting higher economic groth and emploment,exchange rate stability etc.the main objective of the central bank is to servs as the nation as an apes institution to manage the overall banking system rather than earning profits.


COMMERCIAL BANK


The history of banking evolved through the establishment of commercial bank which is the oldest form of bank. It is basically a profit making financial institution that accept deposits and provides lones to customers. Thus, commercial bank is mainly motivated by the profits. It can earn through the difference between the interest on loans and deposits and various customers services. in principle, commercial bank is established for providing short term loans to the bussenessmen. However, the mordern commercial banks performs a number of functions such as consumer leading, industrial financing,foreign exchange operations, ans various others customers services that go beyond the supply of short term loans.

DEVELOPMENT BANK


Developments banks are the specialised financial institutions that are set up to provide loans for development purpose in the various sector like ageiculture, industry,service etc. The development bank also performs almost the developmental activities and have relatively limited scope of their banking activities than commercial banks.

INDUSTRIAL BANK


Industrial bank are those specialized financial institutions which are established for the development of industrial sectors through various way such as by providing loans, directly investing for establishing or modernizing some partivular industry, dealing with the sale and purchase of the share bonus or debentures of industrial establishment, etc.

FINANCIAL COMPANY


Financial companies are those institutions particularly engagde in small and short term consumer financing. The finance companies can accept deposit and extend short term consumers loans with limited amount specified by the central bank directives. The financial companies are small in size in term of the capital and assets so that they can be estabilished in the regional level where other banking institutions are not avaliable.

MICRO CREDIT INSTITUTION


Micro credit bank is a financial institution which is set up with the specific objective of providing financial services in the rural area particularly focusing on the finalncially backward group, sector ans area of the economy. The concept of micro credit institution is developed by prof. Mohamad Yuns of Bangladesh who received the Novel Prize in 2006 for his outstanding contribution in the society through his model of grameen Bikash Bank.

POSTAL SAVING BANK


In order to accumulate the scattered savings from small depositers the postal saving banks operate their services from the branch of post offices. These saving banks collect deposits from the small depositers who do not have easy access to other banking institutions in rural areas. However, the postal saving banks in development countries perform almost all banking transaction like commercial banks.

ROLE/IMPORTANCE OF MONEY

Money is the lubricant of an economy. Without money economic activities such as production, consumption, capita formation etc can not be performed. This shows that money is the life blood of an economy. Due to its quality of portability, divisibility, stability, acceptability and durability, it is regarded as the wheel of the economics’ system. Following are the role of money: The satisfactions can be obtained by consumption of various goods and services, which is measured by the help of money. Due to its purchasing power, people can satisfy their wants by purchasing different commodities with money. Money is used in factors pricing. It is the phenomena of determining the price of factors of production, such as wage, salary, for labor, interest for capital, profit for origination and rent for land. Any producer can maximize the profit by using money.
In production entrepreneur has to compensate all factors of production for their contribution. Rent to land, wage to laborers, interest to capital, profit to enterprises has to pay and without money we can’t assess the exact compensation of factors of production.
Money facilitates the environment of credit business in modern economy. It has made easier both lending and borrowing. Money is also used in standard of different payment. National income of the country is calculated in terms of money which shows the standard of living of people. Without money measurement of national income can not be done because national income is money value of total outlay of a country within a year. Capital is scare and important factors of production. Money provides mobility to capital. Capital formulation is possible when there is an exact unit to measure the amount of the capita in the country. The process of the capital formulation in the modern economy is almost impossible without money.Money plays a signification role in social economic development. It is an effective means of mobilizing factors of production. Money facilities the development of social and physical infrastructure such as road, electricity, communication, school, hospital etc.

ROLE OF COMMERCIAL BANKS IN ECONOMICS DEVELOPMENT

Banks play very importance role in economic development. The growth rate of economy largely depends on the rate of investment which, in fact, depends on the level of saving. Higher saving leads to higher level of capital formulation which is crucial for economic growth and developments. The primary function of commercial banks is accept deposits and provides loans. Thus the commercial banks plays major role in mobilizing saving for capital formulation. The role of commercial banks in development is explained below.


As mentioned above, the commercial banks accept deposits and provide loans of various types. The banks pay interest to the depositors against their deposits. The rate of interest and amount of saving are directly related. This means higher the rate of interest higher will be the level of saving. Thus, banks can promote saving by offering higher interest rate of deposits. This action of banks helps promoting saving which can be utilized for investment in various sectors of the economy. The banks help to allocate funds for optimum utilizations of financial resources in the economy. As the bank use their financial expect to judge the returns or productivity from the funds they lead out, this helps to maximization of returns from the scarce financial resources. The banks collect funds from the surplus units and channel them to the deficits unit of economy. The banks save as the bridge to eliminate the gap between demand for and supply of the funds. For achieving desired profit and avoiding the risk of incurring losses, the banks try to allocate the fund so as to maximized the expect return. Although it is not always possible to allocate the funds optimally, the banks as the profit making institutions seek to manage their portfolio by providing loans to the competing borrowers who invest in the various sectors of the economy and also make direct investment so as to utilize their funds optimally. Thus, banks play important role in resource allocation which is an important prerequisite for economic development. The banks facilitate the trade and industry by providing long as well as short-term loans and supplying various kinds of banking services and products such as L/C operations, foreign exchange facilities, payments settlement, etc. The banks not only accept deposits and provide loans but also create credit while extending loans. In the modern banking, most of the transactions are done through banks. Banks serve as the major agent of international trade while making imports or exports of goods and services. Similarly, the banks helps to promote industries by providing financial resources needed for capital investment and monitoring investment projects so as to minimize the risk. The banks also make direct investment in the productive industries by accumulating scattered and idle resource in the form of deposits. This helps to create more employment opportunities and reduces the rate of unemployment in the economy. These all actions of banks help Promote domestic as well as international trade and industry which are essential for economic development. In the modern globalizes world, citizens of a country are not limited to work within their own territory. They move from one country to another in search of better employment opportunities. While working abroad they send their earnings to the family members or relatives in their own countries through bank Thus, banks help to transfer remittance which is one of the mains sources of income and country’s foreign currency reserve but also helps to construct macroeconomic indicators based on the real statistical records from banks through which remittances are transferred. The increasing volume of remittance has become one of the major sources of investments for economic development in underdeveloped countries.

FUNCTIONS OF MONEY

* PRIMARY FUNCTIONS

Primary functions are the major function of the money which can be explained the following headings. The primary and unique function of the money is to serves as the medium of exchange. It provides the economic freedom to the people. With the money people can sell or bye the product in the market. It also insures the purchasing power of the consumers. Money serves as a common measure of value and standard unit of account. After the invention of the money, value of goods and services can be expressed in terms of currency of money. It has made the transaction easy and simplified the problem of measuring and compeering the price of the goods and services in the market. It also helps to calculate the macroeconomic indicators like NI, per capita income, GDP, GNP and Human Development indicators.


* SECONDARY FUNCTIONS

Secondary functions of money is less important then that of primary functions. This function are originated and derived from primary functions of money. Following are the secondary functions of the money. Money serves as store of value of any goods and services in both short run and long run. In modern world people want to have some currency or coins in their pocket, home ,bank account etc to use anytime for the purchase of anything. The value of goods and services can be store in terms of money for many y due to quality of stability and durability. Money as the liquid store of value facilitates its owners to purchase any other assets in any time. Lending and borrowing was the very difficult before the invention of the money, so that it was difficult to settle of lone. But due to different payment credit system become easy. With the help of money people can buy or sell goods and services only on commitment and payment can be made in the future in the form of installment. Money is regarded as the best transaction due to its quality of stability, accepting and durability. The future payment also possible through the help of money. Money also serves as the common tool to transfer the value of assets and income. Sale, purchase, mobilization and transfer if movable and immoveable property can also made with the help of the money. One can sell at one place and can buy them elsewhere. Value shift from one place to another because it transferred in terms of money.

FUNCTIONS OF COMMERCIAL BANKS

1. ACCEPTING DEPOSITS

The main function of commercial banks is to accept deposits from the public. The banks accept following types of deposits:



When a depositors deposits money in demand deposits, he can withdraw all his money without prior notice. Usually, this type of deposits does not earn interest. The banks cannot utilize such types of deposits for landing purpose because the deposits can demand their money at any time they need. The banks have to maintain cent percent reserve against such deposit because bank should compulsorily make payments to the depositors at the time of their demand deposits for meeting their daily transaction requirements. In saving deposits, the depositors cannot withdraw their all money at once. They have to make prior notice or request to bank before they withdraw more then a minimum specified amount. These types of deposits accounts are usually kept by the depositors with small income for holding their short term savings. The depositors are paid interest against saving deposits. Fixed deposits are made for a fixed period of time that varies from few days to many years. The deposits cannot withdraw their money before the expiry of the special period. However, the depositors can request banks to makes payments of such deposits with certain charge. As the banks can make investment or provide loans based on the timeframe the depositors can withdraw their money, they offer higher rate of interest against fixed deposits than in saving deposits.


2. PROVIDING LOANS

The next important function of the commercial bank is to advance loans. Out of the money deposited by the public, the banks provide loans to others keeping a certain percentage of deposits in their cash value for meeting daily withdrawal requirements. By advancing loans banks create credit. The banks charge higher interest rate on loans than they offer interest to the depositors, known as interest spread, is the bank’s main sources of income.


3. DISCOUNTING BILLS OF EXCHANGE

The commercial banks discount the bills of exchange which are widely used in the modern business. The seller of the goods draws a bill of exchange which the buyers is asked to sign. The buyer is ordered to pay the certain amount after the period maintained in the bills. When the seller requires money, he submits the bills in the bank. Then he will get the present worth of bills leaving the banks to realize them when they are matured. This action of banks is known as discounting bills of exchange. The commercial banks can rediscount the bill of exchange with the central banks, if necessary.

(4) Transfer of Money

The banks are the safest and the fastest and the fastest means of transferring funds from one place to another. The banks send money by means of draft, Telegraphic Transfer (TT), etc. The banks remit a large amount of money earned by the workers abroad in the form of foreign remittance which has become one of the mains sources of income of developing countries like Nepal.

(5) Other Functions

In addition to the primary font boons mentioned above, the banks also perform several secondary functions. They include various customer services such as payments of customers’ utility bills (e.g. telephone, electricity, and water bills), sale and purchase of securities (shares & debentures) on behalf of customers, collection of bills(cheques, exchange bills, promissory notes), exchange of foreign currency, issuance of credit instruments (letter of credit, travelers’ cheques, debit & credit cards), provision of locker for the safety of valuable goods (gold, silver, diamond and other precious jewels), etc.

IMPORTANCE OF PUBLIC FINANCE

There is great socio-economic significance of public finance, both in developed and developing countries. In developed country countries, price-stability and full employment are the main economic goals of public finance. In developing countries, rapid economic development through capital formulation and creation of infrastructure art the important goals of public finance operations. Socially equitable distributions of income, reduction of inequalities in income are some important functions of public finance operations. The importance of public finance can be clarified from the following functions.

Most of the people spend their income on consumption. Saving is very low so the investment is also low. The government can encourage the saving and investment. Unequal distribution of income and wealth is the basic problem of the under developed countries. The rich are getting richer and richer while the poor are becoming poorer and poorer. So for the equal distribution of income and wealth there is need of government. Fiscal measures like taxation and public expenditure programmers can greatly affect the allocation of resources in various occupation and sectors. Fiscal policy will be designed in a manner to perform two functions as of expanding investment in public and private enterprises and by diverting resources from socially less desirable to more desirable investment channels. The state can play a prominent role in promoting economic development especially through control and regulation of economic activities. It is fiscal policy which can promote economic development. Under democratic planning fiscal policy plays crucial role as financial plan is as much important as physical plan and the implementation of the financial will obviously depend upon the uses of fiscal measures. Public finance helps to build up well-development physical and institutional infrastructure. The imbalance between demand for and supply of real resources may lead to inflations to under-development countries inflation ruins the entire economic structure of the national and the process of economic development in these countries comes to stand still. So to check inflation, budgetary policies can be used by the government.

DEFINATION OF MONEY

Modern world is moving with the wheel of money. Money is not only important in every aspect of human life; it is also evil. Money is a good servant but bad master. Hence it is referred as necessary evil.The value or purchasing power of money doesn’t remain same. This fluctuation in value of money causes economic instability. Increasing in quantity of money reduce value of money and invite inflation which makes the reach richer and the poor poorer. On the other hands decrease in the quantity of money increase value of money and causes deflection which increase unemployment and hardship. Money can cause Boom and Slump. During boom employment expand beyond full employment level and price goes very high. During slump unemployment increase and productivity capacity and investment deceases. This trade cycle is monetary phenomena i.e. causes by money. Money cause inequality in the distribution of income and wealth which divide the society into richer and poor and causes class conflict. It disturbed the social harmony. Money discourages the capital formulation because if there is inflection, money gives rich to speculative activity and attracts resources away from productivity channels. On the other hand, if there is deflection, the whole economy machine goes out of gear and spreads missing all rounds. Money brings about social disadvantage. It has been responsible for decline of spiritualism, increasing greed, encouraging theft, robbery, prostitution etc. it also increases exploitation and large scale corruption in the modern society.

ROLE AND IMPORTANCE OF MONEY IN MODERN ECONOMY

There is no doubt that money facilitates and motivates all economic activity relating to consumption, production, exchange and distribution.Money enables a consumer to maximise his satisfaction.Money measures the intensity of desire and the utility of a commodity to a consumer.Money facilitates production by stimulating saving and investment.It gives mobility to capital and helps in capital formation.It enables the harnessing of various factors of production so that the entrepreneur is is able to maximise his profit.Introduction of money facilitates exchange and helps in the development of trade and commerce, both national and international.Money functions as a common denominator for the distribution of social product.It is in term of money that, wages, rent, interest and profits are determined.Money helps the price mechanism to operate and serve as an instrument which has largely contributed to the growth of national wealth and social welfare and social welfare.It has ensured the smooth functioning of the economic system.It has accelerated the process of industrialisation .In money payments.This circular flow is essential for promoting economic welfare.
Whatever the type of economic system money is found to be of great service.In a capitalist economy, money plays an important role because capitalism basically depends, price mechanism which operates through the medium of money.As prof. Robertson observes,"the existence of monetary economy helps society to discover what people want and how much they want............... and to decide what shall be produced and in what quantities, and to make the best use of its limited productive power.And it helps each member of society to ensure that the means of enjoyment to which he has access, yield him the greatest amount of actual enjoyment which is within his reach."Even in a socialist economy, price tags are essential for its smooth, efficient and economical working.It is said while money is a master in a capitalist economy, it is a servant in a socialist economy.Money also plays a significant role in a mixed economy.It plays a crucial role in determining employment,output and income in the private sector.In the public sector, it is helpful in the allocation of resources and for changing the pattern of income distribution.It is a powerful instrument for capital formation and economic development in a developing economy.

MEANING OF MONEY

Money has been defined in various ways.Some say,'Money is that money does.'(Walker).In other words,anything that performs the functions of money is money.In the widest sense, the term 'money' includes all media of exchange - gold, silver,copper, paper, cheques, commercial bills of exchange, etc.But this definition is too wide Cheque, bills, etc., have been called representatives money as they are only convenient representatives of the standard of value.Some writers narrow down the definition to include only the commodity (e.g., gold) that may serve the purpose of money.This excludes bank notes or government currency notes from the category money.These instruments cannot , logically speaking, be excluded, because they possess all the attributes of money, as we shall see presently.
The most commonly agreed view is that, "any-thing which is widely accepted in payment for goods, or in discharge of other kinds of obligations" is money (Robertson).
In Crowther's words."The only essential requirement is general acceptability.Money ....need not itself be valuable.It must, indeed , be relatively scarce, since it would hardly do if money could be plucked off every tree.But, provided precautions are taken to keep it relatively scarce and, it may be added, comparatively invariable in amount- money can consist of things as worthless as a scrap of paper or the scratch of a clerk's pen in the books of a bank."

Money Stock Measure in India
In recent years, there has been a great deal of debate as to what constitutes money supply with the public.While all are agreed on money supply with the public in the sense in which it has been explained above (i.e., currency plus demand deposits with banks), many monetary theorists have expressed the opinion that in a country like India where the branches of banks are confined to cities, towns and only to a proportion of villages and where the people maintain substantial deposits with post office saving banks , it would be a true measure of total money supply with the public , if peoples' deposits with postal savings banks are also included.Accordingly, while money supply with the public in the sense of currency and demand deposits with banks (and other deposits with RBI) may be designated as M1.Another measure of money stock in the country, called M2, would be if post office saving bank deposits are also added to M1.In this case, apart from currency which is most liquid form of money, demand deposits with banks and savings deposits with post office saving banks are also taken into account.
Some economists would like to go further and include time deposits with the banks also in the country's money stock.When that is done, the aggregate of money supply is designated M3 in India.This is equal to the sum of M1 and time deposits with banks.The justification advanced for this is that the holders of time deposits regard their such deposits as near money assets and in time of need can use their time deposits by obtaining bank loans against them or by getting them converted into cash by receiving payment of such amounts before their maturity by foregoing interest which would have accrued had those deposits been retained till their maturity.

TYPES OF BANKS

Althow we broadly defined bank as an institution that accepts deposits and provides lones of various kinds, this defination does not capture the types and nature of various service and products that bank performs. It, therefore, should be make cliear what type of functions that a banks performs, what are the services and products that it can provide to the custumer and to what extent and area it can make financial teansactions. Based on the nature of the services, capital based and coverage of the area banks can be classified into following majour types.

CENTRAL BANK


The central bank is an apex institution to regulate, supervise and facilatate the overall banking system of the country. It servs as the bankers' bank and economic as well as financial advisor to the government. Every country has its own central bank like Nepal Rastra Bank, Reserve Bank of India, Federal Reserve Bank (USA) Bank of Japan etc. It is established for achiving some predetermine objectives such as maintaning price stability, promoting higher economic groth and emploment,exchange rate stability etc.the main objective of the central bank is to servs as the nation as an apes institution to manage the overall banking system rather than earning profits.


COMMERCIAL BANK


The history of banking evolved through the establishment of commercial bank which is the oldest form of bank. It is basically a profit making financial institution that accept deposits and provides lones to customers. Thus, commercial bank is mainly motivated by the profits. It can earn through the difference between the interest on loans and deposits and various customers services. in principle, commercial bank is established for providing short term loans to the bussenessmen. However, the mordern commercial banks performs a number of functions such as consumer leading, industrial financing,foreign exchange operations, ans various others customers services that go beyond the supply of short term loans.

DEVELOPMENT BANK


Developments banks are the specialised financial institutions that are set up to provide loans for development purpose in the various sector like ageiculture, industry,service etc. The development bank also performs almost the developmental activities and have relatively limited scope of their banking activities than commercial banks.

INDUSTRIAL BANK


Industrial bank are those specialized financial institutions which are established for the development of industrial sectors through various way such as by providing loans, directly investing for establishing or modernizing some partivular industry, dealing with the sale and purchase of the share bonus or debentures of industrial establishment, etc.

FINANCIAL COMPANY


Financial companies are those institutions particularly engagde in small and short term consumer financing. The finance companies can accept deposit and extend short term consumers loans with limited amount specified by the central bank directives. The financial companies are small in size in term of the capital and assets so that they can be estabilished in the regional level where other banking institutions are not avaliable.

MICRO CREDIT INSTITUTION


Micro credit bank is a financial institution which is set up with the specific objective of providing financial services in the rural area particularly focusing on the finalncially backward group, sector ans area of the economy. The concept of micro credit institution is developed by prof. Mohamad Yuns of Bangladesh who received the Novel Prize in 2006 for his outstanding contribution in the society through his model of grameen Bikash Bank.

POSTAL SAVING BANK


In order to accumulate the scattered savings from small depositers the postal saving banks operate their services from the branch of post offices. These saving banks collect deposits from the small depositers who do not have easy access to other banking institutions in rural areas. However, the postal saving banks in development countries perform almost all banking transaction like commercial banks.

Can We Avoid Credit Crunch 2?

The chief executives of Britain's biggest banks are trooping in to see the chancellor today, to discuss how a second credit crunch can be avoided.
There are two issues. First, why aren't banks lending more to businesses right now? Second, how can a sharp squeeze in their ability to lend during 2011 and 2012 be avoided?
The first credit crunch led to a reduction in the rate of growth of bank lending to businesses that started in the summer of 2007. Month after month of reductions in the flow of credit culminated in a contraction of business lending of more than 10% per annum a year ago.
The crunch is still showing its effects, with the take up of business loans from banks still shrinking at more than 3% a year, according to Bank of England figures.
What's going on?
Here is what Andrew Tyrie, the new chairman of the Treasury Select Committee, told the annual conference of the British Bankers Association:
"My fellow MPs are acutely aware that sound local businesses are unable to find banking support at sensible prices."
A rather different message was delivered by Stephen Hester, chief executive of the UK's largest business lender, Royal Bank of Scotland. He said:
"RBS alone extended over £40bn in new facilities to business in the UK last year, and £45bn in credit facilities are still available but remain unused. 85% of SME (small business) applications for lending are successful".
He made two further points. First, that banks make an unacceptably low return on their lending to small and medium size enterprises, that they "do not even recover their cost of capital from SME lending".
That rather implies that RBS and the other banks aren't desperately keen to lend to businesses. But Mr Hester insists that the supply of credit isn't constrained.
What's happening, he insists, is that "businesses, unconfident of demand for their own goods and services, and recognising that debt was perhaps too high in recent years, are often seeking to reduce financial risk".
Or to put it another way, Mr Hester argues that what's driving the statistics that show a decline in business lending is that businesses don't want to borrow: with the economic outlook somewhat opaque, businesses are nervous about increasing their debts to finance working capital and investment whose returns look uncertain.
The chancellor will, of course, be aware that this is the banks' position, because they've been banging on to this effect for the best part of 18 months. But he'll hear it again today, from John Varley, chief executive of Barclays, who is today acting as shop steward for the bankers in their meeting with him.
What's the truth of it all? Probably not that there's currently an acute shortage of business credit but that there's a chronic, longstanding problem of mismatch between the kind of finance that smaller businesses want and what banks are prepared to supply.
However, the bigger issue for today's meeting is that there could be an acute shortage of credit in less than a year.
Again, you'll be aware from this blog that the banks are acutely concerned that if they are forced to strengthen themselves against future crises too rapidly - if they are obliged to raise a significant amount of new capital within the next couple of years or increase their stock of liquid assets or move quickly towards balance between loans and customer deposits - that again could spark something of a crunch to credit provision.
Probably the best way of seeing this is from the Bank of England's calculation that every 1% increase in British banks' ratio of equity capital to assets would require them to raise £30bn of new equity.
On the assumption they were able to raise this, it would force them to increase by 0.07% what they charge for their loans - in order to pay the dividends on the new equity that investors would demand. Which may not sound a huge increase in the cost of borrowing for businesses and households, but every little hurts, as they say.
But in practice, and in the short term, banks would endeavour in part to meet the new targets for capital ratios by shrinking their balance sheets. Or to put it another way, they would lend less.
How much less? Well if British banks endeavoured to increase their equity capital ratios by 1 percentage point exclusively by shrinking their balance sheets, that would see them lending a staggering £600bn less on a risk weighted basis (based on 2008 figures) and £1800bn less in respect of gross assets (equivalent to rather more than the output of the British economy).
Now the withdrawal of credit on that scale very quickly wouldn't lead to a return to recession - it would probably engender a full scale depression.
Which is why there is no serious argument against the phasing in of these new capital requirements - although there is still plenty of argument to come over the precise length of the timetable for implementing them.
The big point however is that one of the biggest threats to the UK's (and the world's) economic recovery is a possible second credit crunch. And for all the importance of George Osborne's recent budget, his soon-to-be published discussion paper on bank lending will also be of some economic significance.

Importance of bank

Bankers play very important role in the economic life of the nation. The health of the economy is closely related to the soundness of its banking system. Although banks create no new wealth but their borrowing, lending and related activities facilitate the process of production, distribution, exchange and consumption of wealth. In this way they become very effective partners in the process of economic development. Today modern banks are very useful for the utilization of the resources of the country. The banks are mobilizing the savings of the people for the investment purposes. If there would be no banks then a great portion of a capital of the country would remain idle. A bank as a matter of fact is just like a heart in the economic structure and the Capital provided by it is like blood in it. As long as blood is in circulation the organs will remain sound and healthy. If the blood is not supplied to any organ then that part would become useless, so if the finance is not provided to Agricultural sector or industrial sector, it will be destroyed. Loan facility provided by banks works as an incentive to the producer to increase the production. Many difficulties in the international payments have been over come and volume of transactions has been increased. Cheques, drafts bills of exchange and letters of credit are very important instruments of the banks. The banks collect these instruments drawn on banks in other cities or countries and proceeds according to the accounts of the customer's concerns.

EU bank's muted demand for short term loans boots euro

Relief that a second day of lending by the European Central Bank (ECB) to commercial banks passed off without any nasty surprises helped boost the euro on Thursday.
The results of a tender for six-day ECB funds suggested eurozone banks were managing to repay emergency loans.
The news helped to restore some confidence in the single European currency.
The euro gained more than 1 cent against the dollar, to $1.2371.
Against the pound, it rose almost half a penny to 82.391 pence.
The ECB's six-day lending to 78 banks totalled 111.2bn euro (£91.51bn, $136.7bn).
On Wednesday, the ECB had agreed three-month loans worth 131.9bn euros.
This was less than the 150bn euros to 200bn euros many had expected.
However, although the amounts borrowed indicated that banks had more money than some had feared, analysts said European banks still faced liquidity problems.
"Given that these [ECB] loans were, at 1%, well above the level of [the interbank lending rate] Euribor, the obvious implication is that some banks are still very reliant on the ECB for funding," said Jane Foley, research director at Forex.com.
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Banking shares had been under pressure after the ECB confirmed it would be stopping special 12-month loan facilities for banks from Thursday.
Investors were concerned that European banks could face funding problems as a result. These concerns hit the euro and global stock markets.
News on Wednesday that ratings agency Moody's had put Spain on credit watch amid fears it would struggle to service its debts served to heighten concerns.
On Thursday, the agency downgraded five of the country's regional governments' credit ratings.
However, strong demand for Spanish government bonds allayed fears and helped to boost the euro