Money and Banking

What is Money?

Money is any item that everyone accepts as a medium of exchange. It is widely recognised as a means for purchasing of goods and services and repayment of debts. It allows people to receive anything that they need for a livelihood.

In ancient times, people used to obtain things through the barter system. Here, two individuals or parties would exchange goods and services that the other needs. But the earlier method of bartering did not have the ease of transferability that eventually led to the invention of money. 

For example - if anyone has rice but needs milk, he/she must find someone who not only has milk but also has the requisite of preparing meals. What if anyone finds a person who can offer milk but needs clothes? 

A trade cannot occur in such a situation. Due to such recurring hassles, a relatively more straightforward medium of exchange came into existence and now it has worldwide recognition.

As per the meaning of money in economics, it is a medium of exchange, a unit of accounting that allows people to make any transaction.

In terms of exchange, traders accept money as a medium for buying or selling commodities, and employees consider it a means of remuneration for their labour. As a unit of accounting, it acts as a quick and easy method of calculation.

For example - when someone inquires about the value of an item, it can be merely quoted in its monetary denomination.

What are the Properties of Money?

The concept of money in economics is considered as a crucial element for the proper functioning of an economy. It has become an essential means of exchange in the entire world. It has a value, and people use it to obtain things that they wish to avail.

There are specific properties of money which accounts for its worldwide usage. Some of these include:

  • Interchangeability: Money has a universal application as one can interchange it with other things.

  • Repeated usage: One can use it again and again to purchase anything. It does not lose its value with time.

  • Transferable: Anyone can carry money from one place to another due to its portability.

Define Banking

A bank is a financial institution that allows people to make deposits and receive credit. In India, banks are licensed by the Reserve Bank of India. It operates to provide financial assistance to borrowers and allow cash transactions.

Similarly, banking is an industry that allows credit, handles deposits and provides financial help to borrowers. More broadly, it is a network that facilitates the money flow in the economy. Banks also facilitate companies with an adequate amount of funds to finance their operations.

Money and banking are the two most essential components that drive the economy. Money allows people to make transactions, whereas banks play a vital role in circulating the money supply in the market.

What are the Different Types of Banks?

Banks provide long-term credit opportunities such as credit cards, business loans, mortgages, etc. Similar to other businesses, the goal of any bank is to earn profits.

They earn profits from the difference in interest rates charged from borrowers and offered to depositors.

For instance, a bank gains 4% profit by charging 6% interest from its borrowers and paying 2% interests to savings account holders.

There are different types of banks operating in the market. They are listed out below as:

  1. Retail Banks: These banks offer services to the public, and they deal with the retail market. Their services are known as general banking as they provide facilities such as savings account, current account, short-term loans, credit cards, and personal loans, etc.Most of the retail banks offer wealth management facilities to their customers. They also provide foreign exchange facilities to their NRI customers.

  1. Commercial Banks: They are also known as corporate banks, and these institutions provide specific services to the companies. Apart from its daily banking functions, they offer cash management, trade finance, real estate, and employer services to their corporate clients.

  2. Exchange Banks: These banks mainly facilitate foreign trade in a country. They accept, collect and allow discounting of bills of exchange. These banks also deal in buying and selling of foreign currencies along with general banking activities.

  3. Co-operative Banks: The primary function of these banks is to provide loans at a relatively lower rate of interest to farmers. They offer both short-term and long-term loan facilities to its customers. Short-term loans include credit for purchasing of fertilisers, seeds, etc. whereas long-term funds include credit offerings to farmers for purchasing lands, etc.

  4. Central Banks: A central bank is considered as a lender of last resort. It does not directly deal with the general public; instead, it regulates the functions of the other banks. They are responsible for controlling inflation, rate of interest, and monetary policy, among other necessary functions in an economy.

Why is Banking Essential?

  • The primary purpose of a bank is to keep customer’s money secured. People find it safe to save money in banks as they provide protection.

  • Apart from security, it allows interest on savings to their customers. Instead of keeping money at home, people find it more convenient to save in banks.

  • Banking has become an integral part, as it facilitates advancing loans to different entities. For instance, they offer loans and credit cards to individuals to inflate their purchasing power. They also provide financial advice to its borrowers to aid business decisions.

There has been a constant evolution of money and banking with time. With the ever-increasing demand of the customers, new regulations have been implemented in the banking industry. The value of money always changes with time, and banks ensure a smooth flow of money in the market.

To get a better and in-depth insight into the money and banking project, visit Vedantu’s official website today.

FAQ (Frequently Asked Questions)

1. Difference Between Money and Banking?

Banks are organised institutions that accept deposits from depositors and advance loans to borrowers. On the other hand, money is the medium of exchange that allows the transfer of ownership of commodities from one person to the other.

2. What is the Financial System?

A financial system allows the exchange of money among lenders, borrowers and investors. They deal with the allocation of savings, mobilisation of funds, and facilities financial transactions.