SSEE Unit 5: Banking and Market Forms

Banking and its Types

• A bank is a financial institution that borrows and lends money, accepting deposits and paying interest to customers.
• Banks serve as reservoirs of savings, transferring funds to those in need of loans, generating profit through commissions.
• Types of Banks:
  • Commercial Banks: Serve as the backbone of the economy, receiving deposits and providing loans. Categories include:
    • Public Sector Banks: Government-owned (e.g., SBI, BOI).
    • Private Sector Banks: Privately owned (e.g., Axis Bank, HDFC).
  • Exchange Banks: Focus on financing foreign trade, discounting foreign bills, and managing currency conversion.
  • Industrial Banks: Provide long-term loans to industrial sectors for capital expenditures (e.g., IDBI).
  • Savings Banks: Collect small deposits and promote savings among the public.
  • Agricultural or Co-operative Banks: Offer loans to farmers, including long-term for land and short-term for supplies.
  • Central Banks: Control monetary policy and regulate the banking system. The Reserve Bank of India (RBI) is a prime example.
  • International Banks: Such as the World Bank, provide loans for development projects in low and middle-income countries.

Functions of Central Banks

• Currency Regulator: Sole authority to issue currency, ensuring a uniform money supply in the economy.
• Government Banker: Accepts deposits from and provides loans to the government, advises on economic policies, and assists with financial operations.
• Custodian of Cash Reserves: Manages deposits from commercial banks, offering liquidity as needed.
• Custodian of International Currency: Maintains foreign currency reserves to manage international trade.
• Lender of Last Resort: Provides loans to banks in distress to maintain financial stability.
• Clearing House: Facilitates interbank settlements and transfers, acting as an intermediary for transactions.
• Controller of Credit: Regulates money supply and credit to manage economic conditions.
• Deposit Protection: Oversees commercial banks to safeguard depositors' interests.

Functions of Commercial Banks

• Accepting Deposits: Attracts savings through various accounts:
  • Demand Deposits: Withdrawable on demand, typically with no interest.
  • Fixed Deposits: Higher interest, accessible only after a specified period.
  • Savings Bank Deposits: Limited withdrawals, higher than demand deposits' interest.
• Providing Loans: Funds are lent primarily for short terms to meet immediate business needs.
• Discounting Bills of Exchange: Provides liquidity by cashing in bills for businesses before maturity.
• Remitting Funds: Facilitates inexpensive and secure fund transfers.
• Agency Functions: Acts on behalf of clients for payments and collections.
• Safe Custody: Offers secure storage for valuables and important documents.
• Providing References: Confirms clients' financial positions confidentially for business transactions.

Introduction to GST

• Goods and Services Tax (GST) replaced various indirect taxes, creating a unified tax system in India effective from July 1, 2017.
• Aims to eliminate tax-on-tax cascading effects and simplify taxation across the nation.
• Replaced taxes include Central Excise Duty, State VAT, and several others under the previous tax regime.

Structure of GST

• Comprises four categories:
  • CGST: Levied by the Central Government for intra-state transactions.
  • SGST: Levied by State Governments for intra-state transactions.
  • IGST: Central government tax for inter-state transactions.
  • UTGST: Levied in Union Territories for intra-UT transactions.

Advantages of GST

• Eliminates Cascading Tax Effect: Unifies and simplifies indirect taxes under one legislation.
• Higher Threshold for Registration: Increased turnover limits exempting many small businesses from tax obligations.
• Composition Scheme: Allows small businesses to reduce tax burdens between Rs 20 to 75 lakh turnover.
• Simplified Online Process: Streamlines registration and compliance through online processes.
• Lesser Compliance Burden: Reduces the number of returns businesses must file.
• Regulation of E-commerce: Establishes clear guidelines for taxation in the e-commerce sector.
• Accountability in Unorganized Sectors: Enhances compliance and accountability in previously unregulated industries.
• Improved Logistics Efficiency: Reduces costs and enhances logistics operations across states.

Disadvantages of GST

• Increased Initial Costs: Expenditure associated with acquiring new GST-compliant accounting software and training staff.### GST Compliance
• Small and Medium Enterprises (SMEs) face penalties for non-compliance with GST regulations.
• Businesses must maintain digital records and file returns on time to avoid penalties.
• Transitioning from traditional record-keeping to digital systems poses challenges for smaller enterprises.
• Increased operational costs due to hiring tax professionals and training staff for GST compliance.

Market Understanding

• The market functions as a mechanism for buyers and sellers to exchange goods and services at negotiated prices.
• Key elements of a market include buyers, sellers, and commodities being exchanged.
• Markets exist both physically and online, expanding beyond geographical limitations.

Market Characteristics

• Buyer and seller interaction is essential for transactions to occur.
• Goods or services exchanged in a market are referred to as commodities.
• Modern markets are characterized by the integration of money transactions as the primary medium of exchange.

Perfect Competition

• Defined by a large number of buyers and sellers dealing in homogeneous goods at industry-determined prices.
• Key features include:
  • A large number of buyers and sellers, ensuring no single seller can influence market prices.
  • Homogeneous products lack differentiation, preventing buyer preference for one seller.
  • Firms act as price takers; prices are set by market supply and demand.
  • Free entry and exit for firms foster competition without barriers.
  • Perfect knowledge among buyers and sellers maximizes efficiency and price uniformity.
  • No selling costs are involved due to homogeneity and perfect information.

Imperfect Competition

• Imperfect competition arises when one or more conditions of perfect competition are unmet.
• It includes structures such as monopoly, duopoly, and oligopoly.
• Characterized by product variety, price-setting power, and limited buyer information.

Monopoly

• A market structure with a single seller having significant control over pricing and supply.
• Essential characteristics include:
  • No close substitutes for the product, granting the firm total market control.
  • High barriers to entry prevent other firms from entering the market.
  • The monopolist is a price maker, not influenced by competitors.
  • Price discrimination may occur, allowing varied pricing strategies based on consumer profiles.

Comparison Table

• Perfect Competition:
  • Numerous sellers, homogeneous products, price takers, no entry barriers.
• Imperfect Competition:
  • Few to many sellers, product differentiation, price makers, entry barriers exist.

Important Questions to Explore

• Definition and functions of a bank, both commercial and central.
• Detailed explanation of GST, its advantages, and disadvantages.
• Distinction between perfect and imperfect competition, and analysis of perfect competition features.

Explore the key concepts of banking, including its types and functions of central and commercial banks. Additionally, learn about the introduction to GST and different market forms such as perfect and imperfect competition. This quiz provides a comprehensive overview of essential financial knowledge.