PART _ B

l.Lxplaitl

the characteristics of Sole

l'roprietorsiip. (May/J!ne 2012, N$,/l)ec 2012)

The te1m sole heans single, prop.ietor refers to orvner of the business, rl-hel ihe ov,me*iip and managemefi of business are in conhol of orc iDdividual, it is ktrorrn as sole poprietorship or sole hadership. It is seen everywltere, in everj' country, every state, ev€ry Iocality. The shops or stores which you see in your locality - the grocery s1orc, the vegetable stoiq the sweels shop, the chemist shop. the paanwala. the stationery. storc, the STDISD telephone booths etc. come under sole Foprietorship. It is.not that a sole tndership busincss must b€ a small one. The volume of activities of such a business unit Inay be quite large. Ho*ever, since it is o\Mned and managed b5 one single irdividual, often the size of business remains small.

CMRACTEfuSTICSI

l.

Ownership: The

business eflterprise is olured by one single iodividual, that is tb€ indiyidual has got lega.l title to the ass€ts ard prop€rties ofthe business. The e*ire profit arising

out of blsiness .goeg to 'ihe sole prryrietor- Sir4ilarl-v, he also bee.rs furE.

+.he

entire risk ar .loss of the

2, Management: The owne|ofthe enterprise is generally the rnanager of the blsiness. He has got absolute .ight to plan for the busi.ess and execute them witLout any intei{erorce frcm ary.where.

3. Sourcc. al. Cepitelr The entire capital of ttre.business is provided by the-owner. ln additioe to his own capital he may raise more firnds from outside thtrough bonowings ftom close , relatives or ftietrds. and tluough loans fiom banks or other hnancial iostirudons. 4. Legal Status: The proprietor aDd the business enterprise are one aod the same iD rhe eyes oflau, There is no difference between ihe businoss assels aad the private assers of the sole proprietor. The business ceales to exisl in the absence ol the owner. 5. Liability: The liability of rll€ sole proprietor IS un!imi,.ed. ThiS medns [hal, in caSe tbe sgle proprietor fails to pay fci ..lc biis;ncss obiigatioDs and debts adsing out of business aclvities. his personal property can be used to meet those liabiliries. 6. Saability: Tbe stabiliry and cootinuity of rhe lirm depend upon l}le capacrry. compelence aad the life span of the proprietor.

?. Legal Formalities: In the setting up, fimctioning and dissolution of a

sole proprietorship business no legal foroalities are necessary. However, a few legal resaictions may be there in setting up a particular t1.pe of business.

For erainple, to open a rcslaumnt, the sole proprietor needs a license frorn the locai a urlicipaliry;10 opetr a chemist shop, the individual ,cust have a licens€ ftom the govemment. PaEe I

I

t_

,c 2. Staic

thc advantagcs and disadyantages ofsole proprietorship. (Nor,/Dec 2013)

4DYAN:|AGEs: 1. Easy Porruation: The biggest advantage of a Sole tradership business is its casy fomration. Anybody wishing to start such a business can do so in many cases wiihout any iegal formalitics.

2. Better Control: The owner has fuli conkol over his l-.usiness. He plars, organises, cooldinates the various activities. Since he has ail authority, there is aiways effective coDtrol. 3, Prompt Decisiot Making: As thc sole trader rakes all the decisions himselfthe decision making becomes quick- which rnables $e o*.ner to lake care of available opportuJlities immediately.and provide innnediate solutiors to prcblems. 4, Elexibility in Operations: One man ownership and control makes it possible for change in operations to be brought about as and when necessary.

5. Rgts4tion of Business S€crets: Another important advantage of a sole proprietorship business is that the owner is in a positiol to maidain absolute secrecy regarding his lusiness activities. 6. Direct MotiyatioD. The owner is directly motivated lo put his best effolts as he alone is the beneficiary ofthe proEts eamed.

?. Persoial Atteation to Consumer Needs: In a sole nadership businesg one generally finds the proprietor taking personal care of consuEer needs as he nolmally funetions within a small geogmphical area.

8, Creatinn .of Employneut A sole tradership.business facilitates 6elf-emplo,,nent .and also emploFtrort for maoy othrrs. It promotes enlrcpreoeurial

slill aoong

the iadividuals.

9. Social Bcoelih: A sole proprietor is rhe master of his own busioess. He has absolute fieedom in taking decisions, using his skill and capdbitiry. This gives him high self-esteem and dignity in the society and gmdually he acquires several social virtues like self- reliance, selfdetermination. independent thought and action. initiative. hard work elc.. Thus. he sers an exa.rnple for others to

'follow.

Equilable DlslributioE of Weallh: A r..lc proprierorship business is generally " .r"all scale bu,siiess. Hence there is opportunity for many individuals to o$n and manage small business rmits This errables widespread dispcrsion of economic wealth and diliuses coBceoFation ofbuii,ress in the ha!1ds ofa few. 10.

Liability: In sole proprietorship, the liability of busilless is leaovered from assets of the owner. It resiicts the solc tmder to take more risk an
1. Unlimited the peraonal

Page | 9

.,'olume of his business-

Linited triDa cial Resources: The al-ility'.o raise .ind bonow moirey by one individual is always limited. The inadequacy of linance is a major han.Jicap lir the grordlr of sole 2,

proprictcu ship.

3. Limited Capacity of lndividual: An individual has limitcd knowlcdgc and skill. 'lhus his capacity to undetake responsibilities, his capacity to manage. 10 take decisions and to beat the risks olbtsiress are allo limiled. 4. Uncertainty of duration: The existetrce of a sole iradership business is linked with the . life ofthe progietor. Illness, death or iruolvency ofthe o1|!1er brings atr etrd to the busitess. The coqtinuity of business operation is, therefore, rmcertain. 5. Suiiabifity of Sole

Proprietotslip:

Sole proprietorship busincss is suitaLlc wherc the

ma*et is limited localised and where customers give impodance to peisoDal aflention. This fonn of oiganization is sui{able where the narure of business is simple aod requires quick decision. For business rahere capital requircd is small and risk involvement ls trot heavy, this type of firm is suilable. It is also considered suitable for the production of goods which involve manuel skill e,g. hardicgls, fligrce works, jewcllery, tailoring haircutting, etc.

Bring otrt the salient fcatures ofJoiDt Hindu family business. (Nov/Dec 2012) 'Ihe Joint Hindu Family (JHF) liusiness is a fouu ofbusiress organizalion feuad only in India- ltr &is form ofbusiness, all the members ofa Hindu undivided family own the business .-. jointly.'The Affairsof.busiaessare managed by rhe head ofrhe family; whoistnown asthe "KART A' 3.

l.

Legal Status: The Joint Hindu Family business is

a

jointtf ov,red

jnintly owned propertyr I! is ggvqqpilby.Hirldu La\.,. .Il-can €nter.in]q

business

just like

a

parhers-bjp. agreqrrrelt

with others.

2. Membersbip: There is no membership other than the members o[ the joint 6mily. lnside {Ie firnily also, irisresticted oalftered€ scrrb€ls who ae cc parcsne;s by birth.

3. P+o$1{haring: Al1 co+aoeners i,ave equal slrare in the profits of the business. In the event ofdeath ofany oIthe co-paJcener. his wife caa claim share ofprofit. 4. Mrnagearcna: The managemetrt of a ioirt Eindu famity business is in the hands of the s€nior-most family member who is known as the karta- He has the authoriiy to manage the btsiness and his ways of rnanaging can not be questioned by the co-parcerers.

5. Liability: 'lhe liability of each member of the Joint HiDdu Famity business is limited to Page I 10

O the extent of his share jn his persorul propedy.

fie

bruiness. But the liabiliry of the kafla

r.s

uolirnited as, il cxren(ls

10

6. Fluctuating Sharet The individual sharc c,feach co_ parcenet keeps on fluctuating. .l his is because, evcry bilth of a male child in thc family adds lo the numbJ. J co_parcer"rs und every death ofa co-parcener reduces the numbel. 7. Coutiuuily: A Joint Hindu lamily business continu€s to exist on the deafi of any co. parcener.. Even on the death of the ka!t4 it continues to exist as the n€xt senior most family member becomes karta. Howeyer, a Joint Hindu Family business can be dissolved any timc either tluough mutual agreemcnt between members or by partition,

4. State the adysDtsges and disadyantages

ofJoint Hindu family busiless,

ADVANTAGES:

l

Assurod share iD protits: Every co-parcener is assrired a shaie. in the Fofits ineepective of his contribudon to the succcssful running of ttre business. ff,lr, lrl u ,ray safeguads the intetests of some members of the family like minors, sick, disabled and widows.

2. Freedom in rnanagiug: The karra enjoys full frecdom in conducting the fasrily

business. It enables

him to rake quick decisions withour much inrerference.

3. Sharing of knowledge and experience: A Joint Hindu Family bushess Fovides oppornrnity for the young members of the family to ger the benefit of knowledge and experience of the elder membels and also helps in inculcating virtues like disdipline, self-sacrifice, tolorance e!9. 4,

Utrlimited lirbility of the kart4: The liability ofthe

for that ofthe karta" This makes thc karta

10

co-parceners is limited, except manage the business in the ltost efficient manner.

5, Conti[ued existence: A Joint Hindu Family business is nor affecred by rhe ,insolvency or death of any membet including thar of kana, Thus it can continue for ; long period of time.

DISADVANTAGES:

l. Limited

resources: Joint Hindu Familv busincss has generally limitcd financial il can not undertake big and risky business,

and marng€rial resoume. Therefore,

2. Lack of motivatlon: There is always a lack, of motivation among the membeff to work hard. [t is because the benefil ofhard wbrk does not go entirely to ally indiyidial member but sharcd by all the co-palceners. 3. Scope

for mhuse oI power by

ahe karta: Since the karta bas absotute freedom to manage the business, there is scope for him to misuse it for hispeBonal gains. An inefficielt Page [ 11

krrta oan also do harm to the business.

4. Scope for coallict: In a Joilt ilildu lautily L'usilcss tLe lule memhers of thtee succcssive generations are involved, It al'*a) s lcads to conflict betn€en geDerations.

5. IDstahilityt The coutinuity of business is olwoys undcr threat. It may bc duc to small rift lvithin the family and ifa u>pocener ask for a partition the busincss is closed.

a

Ssillbility ofJoint Hindu Familv Business: The success ofJoint Hildu Family business is mostly depeudent upon the efficiency the kafla and the mutual undenranding betw€en the co-parceners. Nev€rtheless, this typ€ busin€ss is losing its gound with dre Fadual decline in thc joint Hindu family sysr€m.

5.

of of

Erplritr th. fcrtures ofPrrtnenhip. (M.y/Jure 2012, Nor'/Dec 2012)

A partnenhip form of brghnisetion is one where tu/.o or morE l,ersons aE a&lociated to rutr a business with a view to eam Eofit. persorE ftom similar background or pecols of different abilib. a-nd skills;may joh bgahor to carryon a busincss..Each m€mber ofsuch a group is individually tnown as bartneC ard collectively $e memtrers arc known as a lartnership firm,. 'Ihese frmrs are govemed by the Indian partncrship Act, l932.ZA:: Cornrncrc! (Business Studies).

CHAn'ACT-SRISTICSI

l

Number of Partacrs: A minimum of two persons are required to

business. The maximum mcmbershlp o0rer tr?es of business.

lin t is I 0 in case of banking

stErt a parhcrship

busiress and 20 in cas€ of all

2, Contracaull Rclrtlonship: The rclation betwc€n the padners of a padncrship firm is created by contract, The psrtners enter into partnership, through an agreement wllich.may be _veda|ii,rithn ot ift.Dlicd. If tli6 biyccinenf is in ivritinE ir ia known'as a,fiiininhip iiiiii.

3. Compctence of Prrtlcrs: Since individuajs have to

eDter irto a contract io bccome partners, they must b€ compcteot enough to Co so. 'fhus, oinorsr lurutics and insolvent peisons

are not cligible to bccome

part,cri Howcver, a minor can b€ admittcd to the bcnefits of

partnership i.e, he can have a shale ih the profits.

4.

Shrriq of Prolit rtrd

Loss: The panners ean sha& pIofit in atty ratio as agrced. In the ebsence of an agreenent, th€y share it equally, 5. UrliEitcd Li.bility: Thc patErs hsye unlimited liability. They are liabl. joitrtly and scverally for thc debts and obligations of the firm. Credito$ can lay claim on thc personal Fopenies of any individual paxtn€r or all the pafll1els jointly. Even a single pa n€r may be

_-.

called upon 10 pa) the debts ofthc pa.rlnurs.

firn. Ofutnrrsc.

he can gct llack thc money rlue lrcm other

The liebility ofa minor is, howover, lilrite(.i lo the extent ofhis shorc in the plullts, in case uf tiissolrrtion of a fim.

6. Principnl-Agcnt Rehti{Itstip: Thc busilcss in a partnership tirln may be ca(ied on by all.tle partncrs or aryone of ther,r acting fot all. ,Ihis means that every parher is an agent wher-he is acting on b€half of othen and he is a principal *fr", otf,"., u"t Jn nis behalf. lt is, therefore, essential that therc should be mutual Aust and faith among the partne$ il,the inierest ofthe

firm.

7. Transfer of Interestt No parher can sell or harsfer his interest without the consent ofother partners.

r:

iD

le firm to anyone

,"i"r-ta"}::

A partnership Iirn is jus a name for the busiqess as a whole. The 6rm _ -- partBers msans and the partners mean the firm. Law does-not recognise the fiIrn as a sep&rale enlity distinct ftom the partners.

VolunS-r/ Registration: Registrarioq of parmersbip is nor compulsory. But since . ?. registration entitles the firm to several benefits, i1 is considercd deri_Uf". can nrea case. aeainst orler a suit agairur Iy_";1y;-i1 ouEtoers m case ol disputes. claims, disagreements. etc.

f"t*rpf", iiiil,

rlII

il;,;.;, ;;t;;;re

partnership: Dissolution pannership of implies not only of partorership business, but t ,f* i*frAgr-rrly

. l0- Dissolutiotr of closurr or rernioation

agreement among the padnels due to a change in the number

6.

ofpaitneJ

ffie'in

the existing

ExphiE the t-pca ofpartlersbip and types ofpartoers.

lo the narure of agreement among partners, rhere can l:"*d:rg pmnership as follows:

..

a compl€te

be t}rce typ€s of

(i) Parttrerihip at-wilti Such a partnership exists on the will ofthe partnels. That is,.ir car be brought to ar end wh"o"r". po*". gi,J* ;;;;; ;; * ,;;;ru* ; o" *. -y (ii) Parficulsr parttrershipt A particular parmership is formed lor undena_king a particular vmture. It comes Io an end automatically \ ith compietion ofthe rennfe. (iii) Partnership for a ILed duration: Such partnership is fora fixed p€dod of time say 2 yea$, 5 year:s or aoy other duratiotr.

Pa8e.l 13

TrD€s ofPrrlners: The valious types ofpaxtrer

foltd

irr

partrership

filns

aie

a.s

follows:

(i) Active Partirers: Partners who take active pafi in the conduct of day-to-day business of the lirm ar€ called active parhrers. These partners carry r-rn business ou behalfof .

the other partners.

(ii) Sleeping or dormetrl partners: Sleeping or dormant partaels a.e those rvho do rot take active part io tLe management of the business. Such paltners only contribute capital in the firm ard ore bound by the activities of other partneff, Ho$,ever, th€y sharc in the profits and losses of the busioess.

Others: Active and sleepilg paitners are, as a rnatter of fact. the full-fledged partners i.e. they shar€ in Eofits and losses of the business and are liable for i1s dues. Howwer, there are other t,?es ofpa ners also r,dro may be associated witb parmership directly or indirectly. 'ihey ar€ not

ftll-lledged partne$,

such partneB may include the

following:

(a) NoEinal PartneBl Nomiml partners are those who do not haye iDierest in lhe business

generally have a peculiary inteiest (like a share in 6e profits) in lendirg their name to a firm. However in certaia casrs ih€y may not have any pecuniary interest in doing so. For example, a reputed indusldalist may, withoul any profit motive lend his narne to a filrn tun by his fanily methbers.

O) Partners by holditrg out: tf a person by his v"ordi or conduct boids out to a-ooaher ihat will be prevented from denying tbat he is not a partnet. Thi ilstin who tirus becomes liable to third paties to pay the debts ofthe firm is known as a paftEr by holding out. he is a partael he

7.

St.te the adyrntegqi and rtisadvantages of Partner$hip lirm. (Nov/Dec 2013)

1, Easy

Forrr.tiont A

expenses. Every

paxtnership can be formed withoul many legal fonnaiity and need not be registered.

pa nership firm

2. Largcr Reso[rces: As compared to sole proprietorship, a partnership finn can pool larger fimncial resources Thus it catr enter iffo biggea operatioEs ard cai heve more crealit _ facilities. lt can also have better managerial talent 3. Fletibiliq, iE opcr.tion: There lS nexibility ofoperarioo in parroership business due !o a limited oumber ofpartneE. 'Ihese paflners can change their operetions and ametrd objectiles rec€$ary by mulual consert.

if

Paee I 14

/e 4. Better Management: partners

ar., r rer.,

"n"r;p

i,irirc..r;:;,ifiil ..j};,il:,;,:fi,fiJll:;::*",J r"iH,

ul b:r:,tns5s atrij can taie prompt Cecis:orr. ,,

.tl":t#:l-.".t H(:

in

partncNldrr' risk of loss is easier to bear by individual parrne$ as

,*"t;T::,"Ji:1,: d:T;:T#jil::

ai'."n,rne

il:;j;l

rvctl,p:nrer hru au equar

sav

ia deoision makins. A

pu*..,nuffiffi;:1jT"il:ffi ;::L"jf$I.,inr",e.rs r, ""t,.." "*-e. u

7. BcHer publie

In a partnership - rs genera y sma . Relations: nrm k facitirates

firm

cordiat rerurion.r,ip

goup ma-naging thc . allairs of the ,r,i fr'U;;:-","

Lhe

*iu

DISADVANTAGES!

l.

it

Instability: A panneNhip firm does not conrinue ro exisl. hdellnjtelr. The deatll

tnsolvency or runacy of a partner may bring auort

*

ffi,Ir,

-"*p""na

"ni'a 2. utrrimited Liabirity, As the liabitity of pafi*s is joint and severa ri ao unlimited extent anyotre of rhe partnem can be called. upon to ii"l.iorn rri" per.onut r"r. ni properties. Futheq as every partrrer has a rigt ,.

i"'ii'*

vvrotrg decision by a single partoEr may lead to t

,rr" i*I*";""r, *" 0"r", *, "t"i* raoiriti"" io, o*r"i"'i"'"" "",

i,

"ury

Suitability of Partnership Firm:

In a partnership finrt.

Dersons

f"':l#,;!1j"il"':::1:l^1"_T.t-:l

from different walks of life havjng abilily, managerial

*'',".*^.,'*. "r.i"",Il,,".,*"r* ", *; ;,.;;;;;ffi::':ilffi##I#

the organisation, the financial resources,".:,',:_":. the.kill

most suitabte for compamtivety sma.ll business such as retail services, medirun sized Ere+eaBrile ,rofessionat rrou.o.una_ .r_utr y it is se€r thar many organisations are ioitidlv started as pafinership firms and later, when is ," economically viable and frnancially artactive i", l,

il;;;;;;.", ,o_;*il;;:H"ra

*. ;*""",'i

";;;

,il; J;;;:

it

Pate | 15

8.

Expiain thc features ofjoint stock company. (Mny/June 2013, NoYlDec 2012)

Conrpany forrn of l:usirtess organisatiou is a voluntaD' assotiatiol tri pcrsuns [o caflyol buriuess. Norlltaliy, it is giv,.'rr a lcgal stalus alld is subject to cclBin lcgii regrlations. lt is an association of persorN .t/ho gererally contdbute money for solne coirlmo, pLrrpose. Tlre mufivy su contribut.d is thc cdpital of ilrc coutp, ry. TIrc 1lersolrs ,'r'hu outlxibute capilal are its lnembers. The proportion of capital to which each member is enti ed is called his share, therefore mernbers of ajoini stock company are knolln as shareholders and th€ capita! of the cotnpany is known as share capital- The 1o1al share .apital is divided irlto a number of unis knoq,n as'sharei'. You may have heard of the rlames ofjoint stock companies like Tata iron & Steei Co. Lirdted, Hindusu!! Irver Limited, Reliaace Industdes Limited, Steel Authority of India Lin ted. Ponds lndia Liruited etc.

A ioinl Stock

The companies are govemed by the Indian Compaoies Act, 1956. The, Act defines e corDpany as ao.artificial p€rson qeated by law, having separate entity, with perpetual s.uccession and a common seal.

CEARACTERISTICS: 1. Artificirt Person: A Joint Stock Compa.ny is an artificial person in the sense th8t it is created by law aDd does Dot poss€ss physical attributes of a oalural person. However, it has a legal status.

2. Seprrate indetrendent business

kgrl

Entity: Being an artificial person, a compiMy has an existeDce of its membels. Il can ovrl property, enter into coniract &rd conduct any lawfirl

ifl its own nam€. It

can sue and can be sued in the court of law-

held responsible fbr the acs of

A ihfu€holder cannot be

tie company.

3. Common Seai: Every coinpady has a common seal by whlch it is repres€nted while dealing with outsiders. Any document with the common seal and duly signed by an officer of the cornpany is binding on the company.

4. Perpetu.t Existence: A company -ooce fomred continues.lo cxisi as lorg as ir fulfits the requir,ments of law. It is not affected by the death, Iunacy, irsolvency or retirement ofany ofits members.

5. LiD,iied Liabiiiiy:

Tir

iiabiliry oi a member of a Joinr Stock Company is limiteo uy guarantee or the slrares he owns- Ia other r*ords, ia case ol paymeni of det*s by the company, a shareholder is held liable only to th€ extent qfhis share. 6. Trarsfer.bilify of SharB: The membeB of a company are tee to traflsfer the shares held by them to anyone elsc.

7. Formatiol: A corryaty comes into existeoce only when it has be
lbrfied by the initialive ofa group ofpe$ons klown as promoters. 8. A company having e minrmrln memhersh;p - :s Membership: (,frr.o persons and maximum irn) lnowr o a privare Iimircd /.omp.n). ur: ;" .^.-"i."'irUfn Jr,,r.o ,,"*0""r. mininrum is sevee and thc maximum ,u" iuelubership is..rnlimited,

9. .l}lanageElenti tr,o.,er,

Joilt Stock

[ffi"$;:J,:".:'

Corn

*"Iil:ff [:,ll;fi :;:fi lnx"ffi:fiLffi:::,ff rhe company is manased b;

tr" .r,i."r,ora";*"

;;;";";;;,:.",il,Jj]

:

.r.n"*nro*"

Capital: A Joint Srock Comoan y generally . raises a large amount olcapital tlrough issue ofshares. 10.

l. Limited tiabiliry: In a Joint Sr

exrenrof

shardsh"rG,h",""il;.1#.:"J,r#l:H#:I"f

ilTlill;Jrl."lLti,cornPanJ

.

to mise hu*'

*'i'

Jff *tr;,r:rf r:

'"**",i,#*i'riiiliitv,

u

"o-p-y i"

,2.CorthuityofexisteDce:Acompanyisan_anillcialpersotrcreal,edbylawandpossesses Ir is nor atrectei ul. *" a"",i .

;T"fi:fflJJ:X;:ff;

'iJ,'*", "*1lli,1',"".0*'

.**

n

3. Belelits of large scale operatii[r: It is orry the company form of oiganisation which_ capiht for large scale oDemtions..lr resulrs in large ," "*i; ,i,olii'.,. coosequently and reducrio, *" "mciency *"

can provide

,

1f1;ffi,H:.*"

5. Social Benefil: A Ir raciritares promotio,

J

joinl

;;;ffi

stock cor

it also dooates money for education. and social

irstitutions

o;;;r,

".".iil*iil^.

o**

"**

ill;H.""T3ffi#T;,#::::.J#:.;

headth,

corninunity service and rsndeB help io charitsble

6. Research and Development: A

1i,d€velaEentf".l;p;;;";-p;;,:.,r"HffitlT#ff#,ff Foduct$, improving quarity ofproduct, new ways

oft aiiling

its staf. etc.

"ffi

fi ,;_Tj PaEe

| 77

L

DISAT,VANTAGES:

l.

l onnatiol is rrot easy: l'l1e foil[aiior

r'rf a company invoiles compiia[ce Bith a number of legal formalities u.der the rompanies Act and co pliarce \,r.ith severai othet La\\.s.

2, Control by a Group: Compaaies

arc controlled by a group of prrsons kno}!1l as th6 Board of Directois. This may be due to lack of interest on the part of the shareholders who are widely dispersed; ignorance, indifference ald lack of ptoper and timely information. Thus, the democratic virtues ofa company do not really exist in Factice.

3. Speculation and Mrnipulaaiont The shares ofa company are purchased and sold in the lalue or price ofa share is determined in tems of the dividend expecled and the reputatioo of the company. Tbese can be manifuhlcd. BesiCes tbere is excessive speculation which is rcgarded as a social evil. stock exchanges. The

4, Eacessit'e governn ent

cotrtroli A company is expecled to comply with the provisions of pnalty. This affects the snooth functiordEg

s€veral Acts. Non-compliance ofthese in'yites healy

ofthe companies. 5. Deley i-n Policy Decisiors: A company has to fulfill certain procedu-al fonnalities before making a policy decision. Jhese fonnalities are time consumirrg and, therefore. policy decisions may be delayed. 5. Soeid abusesl A joint stoek company is a large scale business organization havilg huge resources. Thjs provides a lot of power to them. Anv njsuse o l" such power creates u teallhy conditions io the soeiety e.g. havi[g mgnopoly of a partieular bushess, itrdustry or product; influencing politicians .an,! govenqe gening._rheir, work done; exploidag workers, corlsuniers and inveslors.

ir

SUITABILITY OF JAOINT S:TO(]K CONPA]\Y: A:ioint stock eomparly is suitable whele the volume ofbusiness is quite largg the area of op€.ation is widespread, the risk involved is heavy arrd thcre is a need for huge fina:rcial rcso&ces artd manpowet. It is also pref€rred whea there is iieed Toi priiissional managimeriiand flexibili:y ofoperations. Il certain business like banking and insuance, business can odv be undertaken by

joint stoek companies.

10. What is meant by Co-operative soriety.

op€rative society.

Writc lhe objectives and varkrus typq3 of Co-

Any ten persons can form a society. It firnctions under the cooperative socielies Acr l 9l 2 ard other State Co-operstive Societies Acts. A co-ope.ative society is enrirely diferent lbrm a.ll other forms of orgaoization discussed above in terms of iis ob.jective. the ao_operalivcs are

Page I 18

lbrmed primarily to tender sewices to its members. society. The m3in obie.tives oj'co-operilti!r .oLi, t) (a) renderirg service tather than eaming

cielerir], it arso provides .,,

som€ sen,;ce to ihe

(:

profri,

,

(b) mutual help instead ofcompetition, and (c) selfhelp in piace ofdependeoce.

a) Cotrsumer co-operatiyes: These arc formed to protect the interesls ofordinary consumers of sooiety by making consume. goods available at reasonable prices. Kendriya Bhandar ilr Delhi Alaka in Bhubaneswar and similai others are all examples of consumer co-ofurati.res.

b) Production co-opemtivcst These societies arc set up to benefit small producelswho lirce problems in collecting inpufs and ma*eting their products. The Weavers co_operative sociay, the Handloom owners cooperative society are examples ofsuch co_opqrative. c) Marketing co-operativesi These are formed by produce* and manufactures to erimhate exploitation by the middlemen whiie rnarketing their prcduct. Kashr,ir Arts Emporiurn, J&K Handicrafts; Utkalika etc, ere examples of malketing co_opemtives.

d) Ilousitrg Co-operatiyes: These are lormed to provide housing facilities to its membe$. Tbey are called co- operative group housing

socicries.

:.

e) Credit Co-operatives: These societies are lormed ro provide finaDcial help lo its members. The niral qedit societies, the credit and il[ift societies, the wban co-operative banl6 etc, come uDder this category.

f) Fcrmitrg Co-operativ(s: These are formed b1 snrall farmers ro carryon work jointly

and

thereby share the b€nefits of large scale farming. Besides these t,?es, otler co-operatives ,an be forrned with the objer:tive ofproviding different benefits m is members, rike the construaion co. opemtives, traDspolt co-opemtives, co-operatives to prc,vide education etc.

11.

Explai[ the chtracteristics of Co-operative society. (Nov/Dec 2012)

C}TAI'AC'TE

R

I.STICS:

l. Voluntary

associatioo: Individuals having common interest can come togethe. to folm a cooperativo society. Any person can become a member of such an organisation ard leave the same. 2. Membership: The minimum membership requircd to form a co_operative society is ten aod the maxioum number is unlimiled. At limes the coopcrarives afier their formatjol fix a maximum membership Iimit. Page | 19

3, Body corporate: RegisBation of a societ], rmder tbe Co-opeiative So.ieties Act is a must. Orce it is registercd. it lrecoines a body ccryorate and enjoys certain privileges just like a jcinr siock aompany. Scrne ofihe f,rrivileger are: (a)'11e society crlioys pclpctrral succcssiou. (b) lt has its own common s3a}. (c) [l can o\an property in its name. (d) It call entei into contact lvith others. (e) It can sue others iD court of law. 4. Service Motive The primary objective of any co- operafve organizalirm is to render services to its Eieebers iD particular and to the sociery in gete.sl. 5, Democratic Set op: Every member has a right to take part in the malagement olthe society. .. Each member has ode vqte. Ggnerally the members elert a c.minittec known as the Executive Committee to look aftet the day to day administratioo and the said cornmifi€€ is resporsible to rhe general body ofarembers.

'

6. Sburces of Fiisnces: A co-oPrative organisatioo shrts $it]r a fuad conrribule by its rEembers in the foi1rl of udts called slwes. It can also mise loans aDri siecuie gra;tsiriiiE the goycmmeot easily. Ooe fourth oftlE profits of the co.operative are lransferred to its imd every ).ear.

-

7. Rctum oo capitali fhe return on capitJl subscrib€d by ihe membcrs is in Lhe form mte ofdividend afler deductibn from the profit.

3. Open Mcmbership, Therc is no Esrriction on aay individual to be a mffrber operalive.

ofa fixed

ol1

co-

4. Stntc Assiitancc: Co-operaives ger a lot of patooage in the fonn of exemptions ard concessions id taxes and fotancial a-ssistance &oE Lhe slale govemrnEnts whicb no other

orgarisatiotr gets-

5. Middleman'r Protrt Elimilatcd: Through the co- operatjve *r€ coosumers contml leir owa supplies od by this rlreanrs the Bliddlema&,s Itlofit is eliminated. paBe

I 20

on"

f;,:.Iu"r*"-"",:

A co-operative functions In a democratic

mar,ner. Each member.has only

7. Windiug up: 'llhe dissolution ofa co-operative firnr is quite dilicuit. It docs not ceasc ro exist in case of death, or irsolveucy or resi$rotion ofa mcnrber.It hi_* thus a fai y slablc life,

DISADVANT GDS! 1. Limited Cnpital: The aoount rrccause

or

the,.*l",.ro,'"-#r,'r'"::r;::T"

peopie.

T;:;i; Jffi :1."::,rffi::1:

2. Piobrems iD Managementi Ge[eralry it is -efficiently due io lack ofmanage.ial taleirt.

seen that co-operative

::"Ifl

,:l

do not function

3. Lack

of Motiv.tiou: Co-operatives are formed to rcnder service to its lremb€rs tharr ro , eam profit. This does not provide enough motivarion to maRage rhe Ji;il;' ;;;; ""_ ..4.-LackofCo-operation:Co-operadvesareformedwiththeveryideaofco_opemlion.But, it is ofter seen that therc is lot of ftiction aod-bickering among the _"*i"oio" to p.oooufity differences, ego clash etc.

4. Lack of Secrecy: Maintenance of business secrecy is one of success of enterprise which the co-operatives always lack.

tlc

inrporiaDt factors for the

5. Dependence otr Govemment The itadequacl, of capital arrd various other limitatjons lnake co- op€ratives dependant on:the govemment for support and patronage in tenns ofgmnts,

When the purpose of business service *lan to eam profit alld to prcmote comrr1on eco[omio interest, the co- operative society is the only altemative. Co-olemtives arc also preferred as it is easier to mise capitar through assistance t * n"*aJi""iiirri.* govemmenr. Genemlly it seems that a co-opemtite ""i society is suirable for small and medium size nyrarions. However. the large s;zed'IFFCO' llndian Farmcrs and F.nilir".; Coop.*l;;l;: the Kaira co-operative processiirg Milk under the brand name urrrur.i a.e the illustrious exceptiolls.

Pace

1

21

13. Erplair lhe chara.ierislics of public corporations (Srnte Entcrprisc). (iuay/Jun. 2012, NovlDec 2012) Stable enterpris€ as a ,brm ol business organization gained econonlic imponance in mcst ofthe counlries, Stale enterprise is an undenaking otwed and controlled by the local or state or central goYernment, for the welfare of thc public at large. Either whole or most of the invelurent is provided by the govemment.

"Public eflerprise means statc ov',nership and operation of industrial, agricultural, financial and commercial undcrtaking." - A.H Hanscn,

OB'ECTIVES: The primary objective of the statc enterpdse is to serve the p€ople and help in creathg an

eaviror^rnwi for induskial acrivity. I

. Hclping

dl rorEd hdulrridb.tioD

Pdvate enteprEn€urs rnore. They people.

Will

will

invest only in those industries where prcfit eaming clances are trot Ltvest in an uodertaking where Fcfits are lov ineErcctive of its utility for

2. Developilg Beric

hdustries

Certah balic industdes likc iron anC stecl chemicals are the rnost c{rmmon ess€ntials for cconomic g'owth. They must bc dcvelop€d only as state managed units. -3i

Estrblilhtng Etrtcrpri!.!-Requllt! I{e.yy irvestncnt

Itr case ofrailways, sinp building cnergy producing concems, etc., very huge hvestnlents is rcquired which is beyond ihe means of private investors. Hcnce govsmment entcr these fields and ctablished. .1.

To ruD Moropoly Scctor!

Sorne i[dustd€s .are io.bc developed only in public sccror. The indusuiee nuclear enelgy, etc., Caflnoi b€ lcll in Frivate s€ctor. 5.

likc defencc,

Proyidc Nec€ssitig

Govemment undcr take to provide vatious necessities like electricity, water, coal, gas and trdnsport facilities to th pcoplc. So public ulilili€s arc provided by govemment und€rtakings. 6. For

Brhnced EconoDic Groryt[ The aim of industialisation is lo develop all industries, essential for the couatry.

7. For Erploitrtion of Naaur.l Rasonrccs Private sector will not like capital in exploiting natural resouces. Oil and Natural Gas %ge | 22

Commission in lndia spends huge amount for linding oat new sources 8. Making

ofoil

aird gas.

for the Employmert

The state by proper centralised planning o{ industrial development.cari aim at nct cnly fitl employmelt oflaboBr but also employment cfall ofher available rcsources. 9.

'Io Increase Goyernment Resources

It

augments the resources of the government which is ultimately directed for the developmeat of the economic schemes of mtional importance and spent on social .*,elfare schemes.

10.

For Btablishing Socialistie pattertr ofSociety The establishment ofa strong public sector is essential for the equal distribution

of

wealth-

14.

What are the f&ctors considered for tLe s.lection ofa suirable form of a orgatrisatioD. (i) Scale of opemtions-manufactudng, tradjng, service

(ii)

Scale of operations. volume served (local. rurjonal, inlernational)

of

business (small. medium, large)

(iii) Finarciat requiiements for starting and ereooding

rnd the market

area

business

(iv) Degree ofdirect control desired bv o,rners

(vi) Division ofprofir (vii) fbxibility of operations

(viii) Stability of business (ix) Legal procedure.

15.

Explaitr rbout Eired ecouooy. (May/Jure 2013)

,il, An economic system tells about the organizalion of the economic activities of the people in gening a living for them. i.e.. the production of goods, ard services and dist bution of them between the people,

lL

An ecoDomic system rcfers to how people organize themselves to sadsry *teir walts.

+

There are maoy kinds ofeconomic system in the world. The principal system are:

Page.l23

1. Capitalisnr

2. Socirlism 3. Mixcd cconomy

I.

CAPITALISM

* & {, l

Capitalisrr is ar economic order in which all the tesourc€s are owned by private peopie. This productioa is done only for p,rofilThere

will

be no interference by the govemment.

SOCIAIISM

* *

In a socialistic syster! the resource$ ate o$!ed by the stat€

+

Alt factories aad fims will

.

The prodwtior and disbibution ofgoods \dill be done for the welfare of tbe pcople and not for the piofit ofthe individuals. be nationalized and

prodrrtion witl be done ia the publie

sec10r.

3.

MD(ID ECONOMY

'

{

Capitalisn bas somemeritsard.ddects. Socialirm has sDffi:(rei,fis8ad deoerits: LthE me ti ofthe two systeos are ccr,binsd byjudicioBs policy, lhere will be grealer welfare ofrlle society.

*

This system takes the best of the two systEms and rejecting the bad orie. In tlih, iherc is scope for private propert), proft motive and private sector. At tbe same tioq the govermElrt plays its role as a socialislic oft with the public s€ctor.

,

CL$.c{erbli.

of

hir.d cto.onv:

l. Erldeace cf PriYrt. cEd Puhli. S.rtorr In mixed economy. the p.ivde sEc{or drd lhe pubiic s€c!o! will exist side by side. Pdvate sector is .lso a part ofthe ecqqomy-

L It i! a PLnned

DcoDoniy

Theie will be a planning authoriiy dlocafug the resoruces betweea private aid public secior-

F.ge I ?4

a 3- Features

ofCapitalism anrl Socialism

In_mixed econooy; the profit motive and sccial interest will be blended. At time, pubiic sector industries will be ' the same mn for the welfare of a count;.

.

*""""

Qiya:allrgrq l. Mixed ecorromy is a compromise of capitalism and socialism. The economy msy lrave the defecls ofthe two systems. Mixed economy niay not remain mixed for a long time- Slowly the public sectqr will swallow the private secror. ?.

3. Since the ateas be

workilg.

ofprivate and Dublic ncctor " st arc defined' there may be gaps where ao ooe u'ill

16, What are the fritrctions of Money?

trtrrctiols ofnoray: The lirnctions ofmoogy are:

l. 2.

primary fimctions Secoodary fu[stions

Primrrv fuuctionsl

in Rupeeg Dollar and pound Sterliag iu Indi4 the USA

Pate | 25

J

terris ofmonetary and o.e ca, coDlptu_c the value of otre good in te.ms ofa[other good i.e., value offour chairs is equal to o!1e table.

Srcondary fuoctiong:

l. Motre) as a Store ofValue

4 a

Peopte hold their assets io several lorms like buildiogs, gold machinery and are.called physical assets.

FiDancial assets are also held as investmeds for the futule. people hold money as an asset b€sause it has the chfiacteristic of store value.

2- Money as a

*

tr7.

l.

.la*i rvhich

Strndard of l)eferred Peyments

Defened pa).rnents mean payroents to be paid at a laler date. For examplg some ftrhne paynetrts are made iD the form ofpensions. principal, and ilteres on debt salatrieq etc.

r#hat are the importsnce of moEey?

fvloney Promotes

*

Slingg

*uirrg" arj ul* iorestrnenl- Ihe growth ofsasiogs i-n the form ofmooey induues the firranciJ insitutioos to mobitise savigs , - from the corn&unity add use them aE pmducliye :qyeskre.ltr,:, ,r- -

2.

Mcnry Protr'otes Er(b&rge atrd Trrde

4 3'.

.

The use of money as a stme of vzlue promor""

i,foney as

a me.lirrm oiexctrarrge and as a rommon measure ofvaluc, cor,lributes exchaoge of goods aad services and growth of t-ade ir an economy.

l.o

Muimises Pmfrts and Satisfectkrn

.

r*

*

Using money as a measurilg scale. people.cornpare&egojs and servic,es.they purchase or sell. It govides aa opportdaiqi to th€ consumer to corhpare the relafive prices of goods and ihe expecte
.t. Reviviug the F.copomy

4

from Rctcssion or D.pression

Excess money supply caused by deficir financiry csn reyerse rec€ssion or depression. . degession, there will be urcoployrDe of labgu, ard other resouces anil idle

h'ing

capaoity in proCuctio* Thffe is

*

Eed for new inwsmehts io exploit the idte

resourc.rs

.

hcreased moley su!,pl), by deficn firarrcing stimutates derraDd for goods and services. Page

| 26

This induces a producerlo.use the prevailixg idle captrcities tc meet r.c increased demand for goods and sorwlccs.

what ale Ihe roles ofmoDev in ,. Muney sriarutatc, 18.

,,il

p.^.--r- r^- -,

",,;il;;::j:I::ffi

Money stimulates productioa ofgoodsand services by inc.easing division oflabour.

" r:::fl:H""1*;^[]1:*'1* '* 2. Motrey Facirirares

-

"*"tst increased monev

r.,".*":'.',:l#iT;;

I:ffi1J:*ilr',lI;ffi::':ases

*l

"

In_a moaey economy,

**'*'r.

supprv and rhis is used

monev supprv and this resurrq in ioflationarv

fina$ial investnerfs tley hold.

on drc frnancial assels that

r'- -"w' o

are- p.efe[ed, as people expect Plul a high

retum

3. Mooey and Forced Sayiog

* + * ..

.

Ecooomists say thal such an inoease in prices ofgoods will force reduce their present levei 'some ofthe people to

ofconsumption.

Abstajning flom such current consumption leads to more sayings. Thus resoruces can be raised for inYestnent ttriough such forcea savings ofthe cornmunlt,.

. .l: Moley proootes InyestDeoar

{ * *

In a developing country. jnvestrnent is normally greeter than thal ofsaving. The level of $\.ing in the developilg couotries is fourd to be loro To step up itrvesheat in these counries, 8"r"r._"r; moaey by way i.crease

*_ r-n*"**,

$il;iltu-".u " 19. Whar sr€ the types

the, investm.eir

";;;; ;;;;;;;'-a

of

ug.i"urru_r

ofBrnkitrg?

a* "uliTjrffi,l;l*o

which deals in monev and credit A modem bank perbrms a

PaAe

12,

TYPES OF BANKS

l. Comn errial Brnks The cominercial banks generally extend $horl teIm loans to busi[cssmen ffrd tradBrs, They carBot give ioan for a long oeriod. 2.

Agricultural Balks These Banks play an important role itr the development of agricultural aclivitio.s.

. 2. 1

They require long

_

te(n loans for purchasing land equipmeats, etc.

There sre two types of agricultural belks.

(a) Agicultural coopeative Bank @) Land Mortgage Ba* The former provides shod-term credit and long lerm credit.

3.

The

hrmen require short-telm

loatrs to buy 8eeds, fertilizers, etc,

3, Foftign Etchrngc B.Dk

ot bafl-ks which spaialize il financing bank trade. Their main imcdor is to make international payme'rts through the purchase and sale bf exchange bills. These are s.pecial rypes

They eonveft hlme curenoy into

lbrci$! curleiEy

aDd vice versa-

4"Irdustrial Banl(s The industrial laoks exterd iong-term loans to indusnies. They also help iadustrial

fiuns

of big iodusrrial coocem 5. C€EtrrI

Brnk

Every cowrtry in the world has a cenrral hank, which occupies a mon€tary and bafiIing structure ofthe countDr.

pintal

prrsition in the

6" tndigeoous Betrk

Ll.ii6enous banl( is a person or a firm which acce?ts deposit& transacB busin€ss in aftI Sahukars in India.

huDdies and advances loans, etc. They are known as Mhajan

20, Whal re

t[e cher..ctcristics of CorEmeieiel brrkirg?

A commercial bank is an insrituiiql that operates for Fofits; it a.cepts deposits from the gmcral public md exl€trds loans to the households rbe firms aad the go.r,emmeri. The accepting for the purpose ol lending or inveshoen! deposits of morey &om thc publig repayable on demand or oth€rwise aad withdmwat*e by cheque, draft ordei or

o6crc.ise."

Pate I 2A

r' Characteristics of Commercial Banks

rl "i ti 4 21. Discws the

.

2012)

Repayable on demand. B,v'.

using cireque withrirrrwable.

For the pupose ofinvestrnent fiom thc public

Fcr the purpose oflending to the public.

vrrious fi:nctions of Commercial Banking. (May/June 2012,2013, NovlDee

l. Acccpt!trce ofDeprNia: The comne.cial (i)

tr

baDks accepted three t,?es ofdeposits Aom the public.

ed Dcpolit Accourt

Mooey

i!

this accouot is ac.apted for fixed period, say orte, two or five yeqrs. The money ofthe fixed tem.

so deposited cannot be withdraw before rhe expiry

(i0 Currttrt Accoutrt The depcsitor can withdraw the money ftom this account whenevsr he requircs. (iii) Saving! Ba* Ac{ourt Some restrictions are imposed on the depositot lrndet this account, The dopositors carr use cheque faciliry to wilhdraw money from this accouut. ffre rafe ot :nterest ofthis accoult is

_

low.

(i) Caih CEdit The bank givos loans to the bollowqs agaiEst ae.tail secudty. The bank operls acaount in the name ofthe debtor and allows him to withdHw thg

e

money fiorn titue to time.

(ii) Ordinary Loans: The bank gives loans.to.ry1on or a firm against soqre qg_cq4ty........,

p

derdrafi:

cheques

The bank allows few

ofits

customerc to overdraw their acco,.lIlrs tbrough

.

3. Itrvertlne.rt of FunCs

Comrnercial banks also invest a part otits surplus fi.uds in the govemmeot securities and gain interest of them. .

4.

Purctase aind Sale ofForeigr Erchatrge

Tho eomnercial ba[ks also carry on rhe business ofbuying and selling forEign curreocies.

Page I ?9

5, Agency Functions

olCommercial Bank

The various ogency fuoctions of bar*3 are:

l

Collecting customers' lirnds

tiofi

other barks.

2. Purchasg ofshares and sales ofshales for its cllslomels. 3. Collecting dividends on the share

ofthe customers.

4. Transforming fimds of the cusiomcA &om orle piace to arother. 5. Paymetrt of insurance premiums oo the Lehalf of the customers.

A modem bank during its opemtion creates quite good deal ofmo[ey which has reaching iolluencc on the cou$e of economic actiyity. 6.

a

far

Financing Intemal ard Foreign Trade: The barrk finairces intemal aad forcigD trade through discounting exchaoge bills. 7.

2?-

Dkcrxs thc various filrcti,ons of Cenfral Barking (Nov/Dec 2012)

The Reserye'Bank of India was primarily estabiishe.rl to dischaiBe the fimctions cf the ceDaal bank of th€ country. The Central Bank not only regulates the functioning of the comxaafcial banks. but also p,rovides necessary advice and stimulus to the conmercial banlis.

.

The cmtral hanls control cost and availahility ofcledit anC gowlb ofmoney sunplf,. the R.escrue Bank of hdia is India's CeFtral Bad and also the monettr), aulhoriry.

Alfilidimfbi{nift fiirictions ola C€oual Bank have

beeo entnxred to the Reservl

B

[:of.lndia-,."

Fufictioa! ol Central Bank

l. Monopoly ofNotc

Issue

4llleCentralbat*isihesol.eauthorityiortireissueofcurrerrcyinIrxiiaothetthanorre

&

4

The design offlot€s ofrarious denominatiom issued by the bank have tu be approved by lhe Ceot-ral Covernmest. The RBI has a separate lssue departrnent which LS enhusred

wih

the issue olcrrrreocy

DOteS.

*

Sii.r

{

Tbe systeo as h exiss today is krown as

1952 the RBI is rcquired to Inainraia gold and foreigr exchaoge resewes ofRs. 200 crorcs ofwhich at leas 115 crorcs shordd be in gold.

nrinierm

reserve

sjat€D

FiBe

J

30

.-

'-

2. BrlEker to the Govemmettt

+

Ihe RBI is agenr ofCentral exceptins that

+ tl {

Gr

"ru

;::llll''

"d

if

alJ

( entral covernments in India

The RBI ha5 rhe obligation to trulsact govemme[t busillcss viz., to keep cash balances as deposits ri.ee of intcrest to recejve anl rou.-,n"* and to carry oul their exchange remiuances a,,u'"ii.rianirl* The Resewe

m"k.;;;;;;;r;; ffiiiJiL" "*""r."r. Bank arso manages Treasury

bilrs and is rcsponsibrc for the issue-ofnew

The Centrsl Bank helps of Govcrnmenl t both Uniol and State to float new loans and to manage public debt.

il

The. Bank ma&cs ways and mcan advanc.es to the Govcmment

$ 3.

ofJamr,

for 90 days. It acts as 8n advisor to the coyernment on all monetary and The Cental Bank aots as adyisor to GovemDlent rct ody oo bar*ing and financial maflers but also orl s widc range_ ofeconomic lr.u". lrafuaing Uora-ln*tr," n"ra of plaDdog and resoulce mobilisation.

b;;;;;;'

^ ""

Banker's Baok

+ -l

The RBI acrs as thc banke/s baok. The schedu.led bar*s can borrow from the RBI on the basis ofeligible secuities or get ,inancial accommodatioo in times ofneed o, ,t i,,g"o"y uiff, exchauge. "r

if*ii""iffi

+

All

banks should kcep a pan

rcservc raiio.

{

oftheir deposits with the Celral Bank.It is called carh

This ratio enablcs to cootlol the issue ofcredit. The cash reserve ratjo at pres€nt ir India is l5%. with the cash rescrves, the cenkal Banr uetwecn thc comrnercjal banks for clcaring their

.*;i;;;

{'

sinc€ RBI ahvays herps othe! banks in tirnes of ba,king crisis, tlre RBI bccomes thc lender offte last

4. Cusaodisr

{ + '

{

;"'rdjrent

aheques, etc,

rcsort.

'

ofForeign Erchrngc Rcservc

The Reserve Bank has theEsponsibility to maintain the ofhcial rate ofexchauge. Afrer Lrdia became I member ofthe IMF ill I946, RBI

maimaining fixed exchange m&s with all o,f,".

has

$e r€spoDsibility of

^.r*. "o*i., ffiffir. ---'oiRs. I H;.

The Bank is arso cmpowercd to buy and sell foreign exchange riom and to schedule.d banks in amounts ofnot less thsa rlte equivalent

PaBe I 31

&

The primary objeclive ofthese coDtrols is {o rcsldct the dernand for

foreigl exchange

wi',hin thc limits ofthc a,,Tailablc suFplics.

5.

Controller of Credit

,t

Th€ Cental Bark has the rcqonsibility to control the volume, cost and the direction credit in the countr-v-

t!

The Bank has nade use ofboth

of

taditiooal or quardlalive metlods ofcredit contol aird

seleclh'e or qualitative coahol.

{ -* *

4

Every batlk has to get a liceose Aom RBi to do banking business within Indi4 the license can be cqDcausd by the Reserve Bank ifcertain stipulaed conditiors are nor fulfillsd. Ev€ry bank will have to get the permissiorr to RBI before it can open a rlew brarlcll. Every scheduled bank must send a weelly rettnn to the c€orral bank It also has power to inspect the acmunts ofany commcrtial bar*.

6. ODGD

M.rket OperatioE

* The cefiBl bank deals with the s€eurities 3rd oth6 near nronies. { Ilit s€lls s€rurity cash flows inlo lhe Central Bank ard reduces rhe availability ofcash the hands ofccmmercial banks advancing ioans, this causes contnrciion

I

?.

of,iredit:

tUhien dre

c&*ial trhkstuys tht :ieiiEitidq cash- fl
Berk Rare

*

The bask rate is defined as the rate of rediscount the already discounted bills b], the

conrmercial banl.

{

red

*

uewed as peial raic ru riiscouage the atdtu& of4poachiog ofoen for iscounting.

t rus mte rs

trn increase itrdicates

a red signal

to the commercial baDts to,educe fheir leDding

operalions-

&F oEot*rn.l FElctiori

*

The Balk's rwpomibilities irchde a part from purely reglrlao*y fmctiolq &e iDsfiudoqalisation of ssvings through the pro$otioo of rh€ ba*ing h*bi{ arii-the

a.tens;dt ofth. ba*ing system tefilorialh abd fuaAiOnally.

bf

in

l_

d

Tle Bank has also taken initiative lbr lvidening tecilitics for tbreign tftde and "industial fir|ance .

the provision

ofiiniince for

9. Cash Rcscr.ve Ratio

4 "i tl 10.

The uommercial baruis are expected to keep a ccrtaiD percentage of their deposits witb Cental Bank. It is known as cash rcserve ratio,

Ifthe ratio is in$eased, the quantity ofdeposit available for lending is reduced. Ifthis ratio is reducad, it increases rhe abiliiy of the banks ro clcare more qedit.

Collectioo aod publicntioD o[ Data

*

The RBI has been entusted with the task ofcollection and cornpilafion ofstatistical inforyation rclating to baoking and other fimn"ia ."ctors oftire

""ono_y.

Write the role of commercial balk in ecooomic dwelopmeal 1. Acclleratirg the Rite of Capital Formation 23.

Capital fornatioo is a process whicl prcceeds tlrough three different srages. I . The qeation of savings by individuals and business hou.es and public aurhorities. 2. Mobilisation and canalisation sarings. 3. The 2. Provision

acqlisition ofcapiial goods out of such funds.

ofFinance and Credit

Commercial banks ate a very imponant source o[ finanoe and credil tor irrdustry and ill aoDcludilg defened paymen{s arrangemerts between the domestic irdustrial undena.ldng fid foreign firms. tradre. They help

3. Distribution of Futrds behyecn Regions commercial barks operate primarily lior profits. Their profirs are .The , wbcn lhey lend lunds for prcductive more

TIIe commeraial ,_ allocatior of

maximised only

uses.

bad.,s to proc€ss- of .lunomjc development is rhat rlrey help in proper fllnds arnoDg diffe.ent region Thus corrmerjal bruks ergines of balanced development in the colrntry. ".

";-;;

4. Developilg Eotrepretreurs I

Bdlrs \E!e assimed rll- _^r^ ."*'"* By g";;;'ffiLff*liLdl

q*s**<=*nffi k rc.F PaBe I 33

the grorving ertrel]renel]fi

.

5. Extension ol th€ Size of IUarket

Commercial banks act as an intennerliary between the seller and buyer' Goods are supplied on bank guaraotees. This makes it viable 1'or ind'rsuy and commerce'

24. DefiDe Credit control and explsiD th€ methods of credit control. (Nov/Dec 2013)

The RBI controls the moaey supply and credit to ensure price stability and meet the varying economic colditions of the gou ry. It estiflates the credit tleeds of Ole ecomfiy in retation to the taryets lsid down in the five year plans and eosures the supply of er€dit to diffeielrt sectors.

MF,THODS OF CREDIT 1. Open

*

COMROTI

Markct Operations

Opetr market operarions refer lo th€ sale and purchase ofgold related securities and o'Jrer securities, bilts and bonds ofgovemment by the RBI ftom and to the public andinaocial

institutio!.

2.

{

To conbot inllatiofl and ta;kle t}Ie problem of excess liquidity due to foreigtr exchnge

"t

lvherr RBI sells goyernment s€crrities in the marke! it withdra'$,s cash reservss of cornmerciai banks &ereby limiting tlrir credit creation cqpacity.

I

lt is only on few occasions thar the Reserve Bank as undertaken open market operations in orde. to absorb th€ sutphls liquid resources oflh€ bar*ing systerl

B.nk Rate Policy bank rate is the rate fixed by the Central Ba* at which it rediscormts fi61alas$ bills ofexchange and goveomert secutjties held t'1, cofimercialSanks.

'i& Tte

Jf

This rate has beea used to irJhleme (i) availabii;i,

*

An increase in lhe Bank rate will encourage batrks in debt to tbe reserve bank to rcduce

d l (ii) c.ost ofcredir.

fte debt.

{ a

A reduclion in the

I}a*

ra1€

will

ma}.e it less expersive to borrow reseryes.

This is likcly to re$it in tlie prchase of secruities and an iucrease in bank dcposiis by banks who are witling lo lliflow leserves at the lower diseount Iate.

t

Pa& I 34

'I

To overcome lecersion iD l( econoi ,ccu"!ng Lh. bor-k rrle,r

onMffch)01L .{ {L

olllslarled lollowinP

(heaD mnnry poticy rii*;""'"n" nAprrl I9q7andsrbsequentlyb,"taresru7fer"cnrb)

'Ihus thc bank ratc ha,l uot been used at 3n insTnroent oforedir control dll l97i' Irisonryinthe r9g0s and r990s. that its proper use has been raade in the foim ofcheap or dear mooetary

policy.

3.

Interest Rate polisy

;l

Interest mte adjustrnent is a flexible and potent tool ofcredit policy.

(i) Depo$it

{

R.tes

Effective April 1992. the baokwere given freedom ro delermine the rerm depositsof three maturitv slabs oruet ctoice suiyect hot exceeding 13

to;;",',*

{ ,{.

iltil|?;e

The minimum period of relm deposits has beeo gradually re.duced &om 46 ro 30 dxys. Ierm deposit rates oa NRE _ accoults wele also rationalised in accordance wilh the domestic

rBtes.

(ii) Letrdiry Ratq!

+ "

.a

{

ln September 1990, the RBI rarionalised the lending mte stnrchfe ofcommercic.l baoks. Il is linked to rhe sre ofloan granred by the commerciat bar** When the iuflation mtes were high. upward revisions were made itr the leoding rates of commercial banks.

4. ChaEg€s itr variable Rescrve

Ratio

(i) cash R€serve Ritio (CRR)

4 {

'Ihe Cesh Raserve Ratio (CRR) IS_an offective insrmment ofcrcdit cotrtol. Under RBI Aci :tj2, iic REI is enpowered to detemrine CRX for the comrnercial banks in the range of 3% to 159,0 for the ag$egate

d";;;;;;;;;r.

(ii) Slatutory Liquidiry Ratio (SlR)

A *

Wbeneve, tbe RBI raised tle CRR, the commercia, banls would make by ircreasing t €ir Iiquidity power through the

The advaatages

ofSLR

,"t"

are tbar by implemenring ir

"f

tie unsuccessfirl

g";";;"r-;;;*.-***-

alolg with CR& it controts the liquidity of banks and thereby rior;ts rheir poweri" ."u;;;;;;;e ard industry.

Page | 35

5, Sclecfive

+ { il

Credit C.rntrals

Selective credit conuols arc meant to reguiate

al

control the supoly of caedit.

They aim at channelising the flow of baak cred;t fionr speculative and (,ther undEsirable purposes to socially desimble and economically usefirl uses. The method ofselective credit conhols was introduced in Under this-

Ildia by

the RBI in May 1956.

(i) It fixes minimum margins for advances against securities for bai*s. There margins are from 20 to l0O percent

(ii) It fixed ceilirgs

on maximum advances agairst stccks ofcertain cosmodities to traders.

(iii) It fixes midmwn discdminating

rares

ofii{erest for c€rta}r kinds ofadvances by banks.

{iv) It Fohibits advarces for fnrancing hoarding ofcertain comrilodities and Fohibits discounting ofbill ofexchange relating lo tbe sale ofsome selegred commodities.

*

6.

the -

This selective credit conhols retate to such commodities as conoD. wheal, ric€, vegetsble oils, sugar, pulses and cloth.

Direct Actions

* *

The RBI has also the 6rwer to hrspect any bank and its books and cccounts. On a repon fiom the RBI. rhe Cer ral Governrnent may prohibit any bank &om receiving -4 .," fiesb-deposn.q +,Lding up of the

bank.

t.

--,....--.......,

7. Moral Su,ision

*

Periodically letiers arc issued to banks urging drem to exercise conhol over credit ia general.

iL

The Reserve.Baok has beeo able to build up good relations.wifh conrmercial balks:

'il

Ttre rDajor 20 lndiao sclredules coomercial ban*s should enhance rhe risefutness of instnrment.

24. What is neant t,y moEetary potricy?

E onth with shbility.

EipIfi

tbe

6is

Rcseri! baDk,s monef*ry poli(y of

Rexrve Balt controls and rtgulales lhe money supply in our courtry. Money npply s8.nqy consists of currenc!' moeey and credii mone), in cLculatiad. Gl behatf of the govcfEmenl Resewe Baok '[rttoduces monerary measures to anain the macro ecoromic aod dtlror goals ofthe cordtry. l ,aee I 36

'AnJ \onscious acrion undenaken hv,h^. .^^,^_ r'rrhorilier ro changc rhe dviitJbitir) or cosr oi'mnncv,. q,r:inrir) "''"trary -

n,"rt?#rfi

Ohjectives oI MoDetary policy

(i) Full enploynent

(ii) pdcc slabitity (iii) Stimulating economic growth (i) Full Eoptoyoetrt

4

Full employment refers to the situatioo in which all emPloyable rcsou.ces are ettrciently

enployed.

.4

ftlly

and

Prc-f Kcynes suggests increasin g ofconsumption alld investnent expenditure to reach firli

employment,

(ii) Price Stabitiry

{L

price

sability enswes cer.ain

adv.rntages:

(i)

It enables money to functioD as a store ofvalue and a standard ,ofdefered paytneDts more effecti vely.

(ii) Reduces business 0ucruations like inJlaiion and dcllarion. (iii) EDsures equitable distributior ofincome u*orrg tlr" peopl" aod (iv) Promotes economic wellare ofrhe people. (iii) Ecotrortric Croflh Eccnomic growt} isindicared bv iocrcase io CNp and percapila income. Ultimately srandard ofJiving is raised and inequalities of incorne reduced. sui*J,l ,r, associalion with fiscal policy, sustaias rhc pro_o,jon

r"*oo ,,", ol".;;;.];;;il:"**,

RESER-Va:

* *

BANK'S MONETARY pOLrCy OF CROWTH }VITH STABILTTY The deveioping countries like Ildia suffer fiom ihe undcr deverp_"o,

,**

*O chronic unemploymeal. For this, the expansion in the rate ofinyestoEntjs nwded ln odcr to ensure growth rirh *.0,,,y,..*" R:.:rve Bank oflndia has be€lr following a policy ofcorholled crcdit expansion. it.has triea ," U,f,rgli.* rf," i"plp"rate degle€ of moneta.ry expansion to meet the

*Reservebankorrod,"*,,"0;'::;1:H:ffi::::;I;;:,'#;,"

Page I 37

holding ofesseltial comnlodities

'lhr

!i

order to contrcl exeessivc risc

esserce ofBonetary malagemeDt by tile Reserve

of monetary expansion in keeping

*ith

Bark

ir their Frices.

has bcen adjusted the pace

the changing requirements of the economy.

EXPANSIONARY MONETARY ?OLICY ACCORDING TO "KEY]YESIAN YIEW"

il

Keyne was one ailments

4

ofthe sconornists who dirccted their efforts not only diagnosing the

ofthe economy but also in prescribing riglrt remedies for them.

The 'Pre-Keynesial' classical tlpe ofmonetary policy tried to cure depression simply by making more oental baok funds available at iow rate of intarcsi.

*

The objective ofmonetary policy not only to cure booms and deprcssions when they have alrcady occurred but to check thc recessionary te.delcies in their initial stages.

a

Accolding to Keyns, fidl employment of available resources which will automatically lead to maximum ouqruL can only be attained by rnai aiaing *tr adequale volBme of expendituie in the coDntry-

tL.

trn order

l2. 'l

to cure uremployrent, lhe moretary policy should aim at

Expanding consumption (C) expenditure

Investmerf (I) expenditure

Since the consurnption firnction is

rntri or less stable in

the short pcriod. tbe monetay

in!,Estment, monetarJr policy toies to maiffain it.

4

h

tbe words of Keloes, 'the objecr of monetary po'ticy should be fo reduce ebb and llow ofthe trade cycle and bring about equilibrium between mvings and ineestnEtrt at the

point of full employment.

25.

Wlat erc lhe various tbrm-r of credit inslrumen(s xnd aheir

uses? (Nov,,Dea 2013)

R.cteil Pevoeni Svstem

TEs pa)me[t system is asimpo{ont as the large value paymEni sysiem and has a larger Bser group. A person with a paJrsreot card of any kind is part of the retail paymelrt systeB. At the Flail level mosl hansactions involve cash, cheqlEs or cards.

t.

eisL

is the prcfeired melhod

acccl[ed, Carlyirlg too nuch

bt

small papuents because it involyes no credit atrd thelcfor.can usually purchase goods and services easily as widely cash is risky as i{ can leid to trheft eDd other problerfts However,

ro ;norrbes. With cas\ you

it

Page I 38

I

people still cary cash for its conv rransacticlrsitrecompl"r".lia^"6;u,.lll',e.and flexihilit). FIom thc

cheques

2.

a cheque is an order t--iy

ps).ee. ehcgues tuc

rradilionallv

p,r-veir's po;Dt of vie\r,, and this casir cr:r be re-used tbr oth;r bansactiors.

the paver's hank to the uccount of fie Tnis..fiom ,i1.'1Lll1bi tur':rr months atier thc dare uf issue. t he use ofcheques has al,r""ai6

g*".oiry

0"n.,*i*

i", ,,"Jlili]ilti;r'l:::i::jn"^r:l:l*nrerrr

,nsr,un,cr,rs. cheques ,cmain a]1 promise ro pay the amounr o, rr -a',.-";; paym€nt. Cheque cleaxance "tut.c usual,y takes J - q ,aorking

of urher payment

; #;;:;:::;.;,:Ti*,-:".n:li:il"fiT: Oays.

Advaplages

* *

Safer.rhan cash e.g. a crossed

Preferable for rarge sums

ofcash.

*

que can

,

or y be deposited into

amounts and a large -

the payee's

ac'ount'

nurnber of pajanents to avoid car4,ing large

Paymenm can be made at your convenience and posled to the payc!.

Disadvanlaees

{

Can take up to

3

-

4 working days before funds are ayailable to use-

fl* there is no gutra.ftee *, *".|ur,".

rl

has sufficierf

*0"

and

*

the cheque rnay

There are extra cosrs if the paye_e wlls.an inunediate ctearance of firnds. Cheques also have other administrative costs associated ro it.

3, Debit Card is 8 payment card wberc tl.rc card hotder's bank accounr upotr

hTsltion

amount is deducted di.ecfly

authorizarion,;;;;-;::::I-::,*"i,*.

fro_ ti,e

;;;;^,ffi ,H#*:,;il*"Ii#"fJtr ; rH:ffi:H:,:H il

A-,,M cari commercial.can banlc are

the prq*ess of i

arlow ['e public lo use any completed in a few

EfrPos

interoperabiiitv io Fiji. rru--s will This project will be

o"*., o"Lli^1T*]"ial o" caro at anJ' EFTPoS machine

month"

Advartaqg

{F

Card paymenrs accounl

will only be accepied if rhe card holder

*

Can be used tor mail ordcr or onlioe purchases.

L

Less risk than holding cash.

TIre

sk

has sumcient funds

in hisibcr

oftbcft is mirigated bylaviog pi+eodes.

Disadvatrtaseg

+ 4

Takes up to tluee days for money to be received aad acknowledged. Operared at a fee payable to fte

bant.

Pa6e I 39

erabies its holder to buy goods and srrvices with a credit li e given by credil card issuer. Funds are seltled at a later date- Cerd holders ore billed on a monthlv basis and bear financial charges (interesi) on outsrandi.g aiDu.rts if payfients are oot made by the due daie. Credit cards are issued through commerciai banks ard/or other issuers. Advrntaqes J, Credit Card

4 rl

-

Guaranteed palment Ep 10

m approved limit.

Can be used for rnail order and onliue puchases.

Disadvautases

$ a *

A

fee is paid to the

banl for this service.

High intsest rates make qedit cards all sxpensive mode ofbmrowing. Theft

- if tbe card is stolen or if intemet payment-sites

are trot seclrle.

5. Dire{t Debit - mo[ey is traNfered automatically froE a payer's to payee,s ba6k a.comts. Tle payer must instruct their bank to make direcf debit lEymerlts and the payee provides aracunts and dates oflhe pajnlrolts. This facility cao be used for paying diffqat alnbunls add is. usefirl for paying regular bills..

A&rpt{ges

'l fl a

Cugomef,s don't have to

!L

Businesses cae change aoorrrtt and paymerf dates

Businesses are guaranteed payrnent.

Customers don't have to remembei pavmeDt dates.

DitrdY.rt

4

w

te

cheques.ed pog [hem,.

ses

Monies are paid ei€n customer can

if

there is no money in the customer,s accour . ?herefme the rlcur a barik overdruft at a high iatffesr rate.

S&trding Ner - itr this facility mo{ey is tr"mfened auto&arical.Iy &om lhe custome.,s acerrwlffiregEtar intervals. Srrch o&iers ca:i or*y be Dsed for payiag the sane affowtt. eit$ts6cFs do not have to write cheqbe$ ortcmcm&rpq,crent dates However, paymens may ' nol be made ifthere are insufficient fimds in the custome/s accouDl. 6" lntefnet B.nkiLg - a fast ard coqvenient way of performing barrdng tasactiols such x BrNfbrring finds from yonr savings to current accoofil or to a third party account.

.i*{a*t

*

seg

Fa$Ilents arc n Fde at yor]r corverience-

Fdge I

4e

Secued by uscr name and pas$a,ord_ Can be used frcm anlvherc iE the woild

wilh intemet

access.

Disadvantages

* $

Access to computers and iiriemet services is required.

Intemet comes at an additicnal cost.

7. Mobile Batrking - a service provided through ue combioed €fibrt of a bank and a mob service provider, to perforrn cormon baDking tlarrsactions. An active and a mobiie phone equipped

is

baEk account

Mth features required by the bank.

e

nesdod

Advaatag€s

* * lL

Secrred to easure llser fudbmation is available anytime. Fast and convenienl.

Payments

mai be made from anywhere that

has your mobile network coverage.

Dbadvaotts€s

*

Mobiles need to be kepr safely, otherwise misuse rnEf occur.

.L

Mobile phones come at

a cosi aDd oecd to be recharged.

-

8- Mobile Motrw allows customers to make paymeDts to selected merchants a-od other individuals tbmugh their mobile phones. Bill payments and purchases of goods and services re among tle casl ess kansacl:cos tbar uan be made. To enjoj the beneEts-of m"lril"

;;^"y, ;;

rcgiiter and or€n alr acrourt with the mobili money service proyidgr. Exanples ofmobile money services in Fiji are vodafone's M-paisa and Dgicel Motrile Mooey. '. customer has to

Advatrtasc!

,&

rl.

Fast, reliable ard efficieot mobile payments nray be made at any time

ofthe day.

Colvenient for making payments to and receiying paynrnts tonr people in remolc areas.

Available in aDy parl ofthe counEy where there is network coverage.

IL lhe moblle wallet is protecled by safe.

a pin aDd

if the lhone is los/stolen your money is sill

Page I 41