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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 solepoprietorship or sole hadership. It is seen everywltere, in everj' country, every state, evryIocality. The shops or stores which you see in your locality - the grocery s1orc, the vegetablestoiq the sweels shop, the chemist shop. the paanwala. the stationery. storc, the STDISDtelephone booths etc. come under sole Foprietorship. It is.not that a sole tndership busincssmust 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 businessremains small.

CMRACTEfuSTICSI

l. Ownership: The business eflterprise is olured by one single iodividual, that is tbindiyidual has got lega.l title to the assts ard proprties ofthe business. The e*ire profit arisingout of blsiness .goeg to 'ihe sole prryrietor- Sir4ilarl-v, he also bee.rs +.he entire risk ar .loss of thefurE.

2, Management: The owne|ofthe enterprise is generally the rnanager of the blsiness. Hehas got absolute .ight to plan for the busi.ess and execute

them witLout any intei{erorce frcmary.where.

3. Sourcc. al. Cepitelr The entire capital of ttre.business is provided by the-owner. lnadditioe 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 rheeyes oflau, There is no difference between ihe businoss assels aad the private assers of the soleproprietor. 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 tbesgle proprietor fails to pay fci ..lc biis;ncss obiigatioDs and debts adsing out of businessaclvities. his personal property can be used to meet those liabiliries.

6. Saability: Tbe stabiliry and cootinuity of rhe lirm depend upon l}le capacrry. compelenceaad the life span of the proprietor.

?. Legal Formalities: In the setting up, fimctioning and dissolution of a soleproprietorship business no legal foroalities are necessary. However, a few legal resaictions maybe there in setting up a particular t1.pe of business.

For erainple, to open a rcslaumnt, the sole proprietor needs a license frorn the locaia urlicipaliry;10 opetr a chemist shop,

the individual ,cust have a licens ftom the govemment.

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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 iegalformalitics.

2. Better Control: The owner has fuli conkol over his l-.usiness. He plars, organises, co-oldinates 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 decisionmaking becomes quick- which rnables $e o*.ner to lake care of available opportuJlitiesimmediately.and provide innnediate solutiors to prcblems.

4, Elexibility in Operations: One man ownership and control makes it possible for changein operations to be brought about as and when necessary.

5. Rgts4tion of Business Screts: Another important advantage of a sole proprietorshipbusiness is that the owner is in a positiol to maidain absolute secrecy regarding his lusinessactivities.

6. Direct MotiyatioD. The owner is directly motivated lo put his best effolts as he alone isthe 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 asmall geogmphical area.

8, Creatinn .of Employneut A sole tradership.business facilitates 6elf-emplo,,nent .andalso 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 absolutefieedom in taking decisions, using his skill and capdbitiry. This gives him high self-esteem anddignity in the society and gmdually he acquires several social virtues like self- reliance, self-determination. independent thought and action. initiative. hard work elc.. Thus. he sers anexa.rnple for others to 'follow.

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

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

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.,'olume of his business-

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

3. Limited Capacity of lndividual: An individual has limitcd knowlcdgc and skill. 'lhushis capacity to undetake responsibilities, his capacity to manage. 10 take decisions and to beatthe 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. Thecoqtinuity of business operation is, therefore, rmcertain.

5. Suiiabifity of Sole Proprietotslip: Sole proprietorship busincss is suitaLlc wherc thema*et is limited localised and where customers give impodance to peisoDal aflention. Thisfonn of oiganization is sui{able where the narure of business is simple aod requires quickdecision. For business rahere capital requircd is small and risk involvement ls trot heavy, thistype of firm is suilable. It is also considered suitable for the production of goods which involvemanuel skill e,g. hardicgls, fligrce works, jewcllery, tailoring haircutting, etc.

3. 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 inIndia- 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'

l. Legal Status: The Joint Hindu Family business is a jointtf ov,red business just like ajnintly owned propertyr I is ggvqqpilby.Hirldu La\.,. .Il-can nter.in]q parhers-bjp. agreqrrreltwith others.

2. Membersbip: There is no membership other than the members o[ the joint 6mily. lnside{Ie firnily also, irisresticted oalftered scrrbls 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 theevent 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 thesnior-most family member who is known as the karta- He has the authoriiy to manage thebtsiness 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

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the extent of his share jn fie bruiness. But the liabiliry of the kafla r.s uolirnited as, il cxren(ls 10his persorul propedy.

6. Fluctuating Sharet Theindividual sharc c,feach co_ parcenet keeps on fluctuating.

.lhisis 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 continus to exist on the deafi of any co.

parcener.. Even on the death of the ka t4 it continues to exist as the nxt senior most familymember becomes karta. Howeyer, a Joint Hindu Family business can be dissolved any timceither 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 Fofitsineepective of his contribudon to the succcssful running of ttre business. ff,lr, lrl u ,raysafeguads 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 fasrilybusiness. It enables him to rake quick decisions withour much inrerference.

3. Sharing of knowledge and experience: A Joint Hindu Family bushess Fovidesoppornrnity for the young members of the family to ger the benefit of knowledge and experienceof 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 co-parceners is limited, exceptfor that ofthe karta" This makes thc karta 10 manage the business in the ltost efficient manner.

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

DISADVANTAGES:

l. Limited resources: Joint Hindu Familv busincss has generally limitcd financialand marngrial resoume. Therefore, il can not undertake big and risky business,

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

3. Scope for mhuse oI power by ahe karta: Since the karta bas absotute freedomto manage the business, there is scope for him to misuse it for hispeBonal gains. An inefficielt

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krrta oan also do harm to the business.

4. Scope for coallict: In a Joilt ilildu lautily L'usilcss tLe lule memhers of thteesucccssive generations are involved, It al'*a) s lcads to conflict betnen geDerations.5. IDstahilityt The coutinuity of business is olwoys undcr threat. It may bc duc to a

small rift lvithin the family and ifa u>pocener ask for a partition the busincss is closed.

Ssillbility ofJoint Hindu Familv Business:The success ofJoint Hildu Family business is mostly depeudent upon the efficiency of

the kafla and the mutual undenranding betwen the co-parceners. Nevrtheless, this typ ofbusinss is losing its gound with dre Fadual decline in thc joint Hindu family sysrm.

5. 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 ofdifferent abilib. a-nd skills;may joh bgahor to carryon a busincss..Each mmber ofsuch a groupis 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 (BusinessStudies).

CHAn'ACT-SRISTICSI

l Number of Partacrs: A minimum of two persons are required to stErt a parhcrshipbusiness. The maximum mcmbershlp lin t is I 0 in case of banking busiress and 20 in cas of allo0rer tr?es of business.

2, Contracaull Rclrtlonship: The rclation betwcn the padners of a padncrship firm iscreated 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 bccomepartners, they must b compcteot enough to Co so. 'fhus, oinorsr lurutics and insolvent peisonsare not cligible to bccome part,cri Howcver, a minor can b admittcd to the bcnefits ofpartnership 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. Inthe ebsence of an agreenent, thy share it equally,

5. UrliEitcd Li.bility: Thc patErs hsye unlimited liability. They are liabl. joitrtly andscverally for thc debts and obligations of the firm. Credito$ can lay claim on thc personalFopenies of any individual paxtnr or all the pafll1els jointly. Even a single pa nr may be

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called upon 10 pa) the debts ofthc firn. Ofutnrrsc. he can gct llack thc money rlue lrcm otherpa.rlnurs.

Theliebility ofa minor is, howover, lilrite(.i lo the extent ofhis shorc in the plullts, in caseuf tiissolrrtion of a fim.

6. Principnl-Agcnt Rehti{Itstip: Thc busilcss in a partnership tirln may be ca(ied onby all.tle partncrs or aryone of ther,r acting fot all. ,Ihis means that every parher is an agentwher-he is acting on bhalf of othen and he is a principal *fr", otf,"., u"t Jn nis behalf. lt is,therefore, essential that therc should beofthe firm.

mutual Aust and faith among the partne$ il,the inierest

7. Transfer of Interestt No parher can sell or harsfer his interest iD le firm to anyonewithout the consent ofother partners.

_ --r: ,"i"r-ta"}:: A partnership Iirn is jus a name for the busiqess as a whole. The 6rmmsans partBers and the partners mean the firm. Law does-not recognise the fiIrn as a sep&raleenlity distinct ftom the partners.

. ?.VolunS-r/ Registration: Registrarioq of parmersbip is nor compulsory. But sinceregistration entitles the firm to several benefits, i1 is considercd deri_Uf". f"t*rpf", iiiil,

Iy_";1y;-i1 rlII can nrea case. aeainst orler il;,;.;, ;;t;;;re a suit agairurouEtoers m case ol disputes. claims, disagreements. etc.. l0- Dissolutiotr of partnership: Dissolution of pannership implies not only a complteclosurr or rernioation of partorership

business, but t ,f* i*frAgr-rrly ffie'in the existingagreement among the padnels due to a change in the number ofpaitneJ

6. ExphiE the t-pca ofpartlersbip and types ofpartoers.

l:"*d:rg lo the narure of agreement among partners, rhere canpmnership as follows:.. (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". -y po*". gi,J* ;;;;; ;; * ,;;;ru* ; o" *.(ii) Parficulsr parttrershipt A particular parmership is formed lor undena_king a particularvmture. It comes Io an end automatically \ ith compietion ofthe rennfe.(iii) Partnership for a ILed duration: Such partnership is fora fixed pdod of time say 2yea$, 5 year:s or aoy other duratiotr.

be t}rce typs of

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TrDs 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 ofthe 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 takeactive part io tLe management of the business. Such paltners only contribute capital in the firmard ore bound by the activities of other partneff, Ho$,ever, thy sharc in the profits and losses ofthe 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 areother 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 ihy may not have any pecuniary interest in doing so. For example, areputed indusldalist may, withoul any profit motive lend his narne to a filrn tun by his fanilymethbers.

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

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

1, Easy Forrr.tiont A paxtnership can be formed withoul many legal fonnaiity andexpenses. Every pa nership firm need not be registered.

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 oa limited oumber ofpartneE. 'Ihese paflners can change their operetions and ametrd objectiles ifrec$ary by mulual consert.

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4. Better Management: partnersar., r rer., "n"r;p i,irirc..r;:;,ifiil ..j};,il:,;,:fi,fiJll:;::*",Jr"iH, il:;j;ll 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 it

,*"t;T::,"Ji:1,: d:T;:T#jil:: rvctl,p:nrer hru au equar sav ia deoision makins. Aai'."n,rne pu*..,nuffiffi;:1jT"il:ffi;::L"jf$I.,inr",e.rs r, ""t,.." "*-e. u- 7. BcHer

publie Relations: In a partnership firm Lhe goup ma-naging thc allairs of therm rs genera y sma . k facitirates cordiat rerurion.r,ip *iu ,r,i fr'U;;:-",".

DISADVANTAGES

l. Instability: A panneNhip firm does not conrinue ro exisl. hdellnjtelr. The deatllnsolvency or runacy of a partner may bring auort * -"*p""na "ni'a ffi,Ir,2. utrrimited Liabirity, As the liabitity of pafi*s is joint and severa ri ao unlimitedxtent anyotre of rhe partnem can be called. upon to r"r. ni i"'ii'* ii"l.iorn rri" per.onutroperties. Futheq as every partrrer has a rigt ,. "t"i* i, ,rr" i*I*";""r,", *" 0"r", *,vrotrg decision by a single partoEr may lead to t"ury

raoiriti"" io, o*r"i"'i"'"""

Suitability of Partnership Firm:In a partnership finrt. Dersons from different walks of life havjng abilily, managerial

f"':l#,; 1j"il"':::1:l^1"_T.t-:l ".:,',:_":. *'',".*^.,'*. "r.i"",Il,,".,*"r*",he organisation, the financial resources, the.kill *; ;,.;;;;;ffi::':ilffi##I#most suitabte for compamtivety sma.ll business such as retail il;;;;;;.", ,rofessionatervices, medirun sized Ere+eaBrile rrou.o.una_ .r_utr ,o_;*il;;:H"ra y it is serhar many organisations are ioitidlv started as pafinership firms and later, when it isconomically viable and frnancially artactive i", *. ;*""",'i l, ";;; ,il; J;;;:,"

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

A ioinl Stock Conrpany forrn of l:usirtess organisatiou is a voluntaD' assotiatiol tripcrsuns [o caflyol buriuess. Norlltaliy, it is giv,.'rr a lcgal stalus alld is subject to cclBin lcgiiregrlations. 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 outlxibutecapilal are its lnembers. The proportion of capital to which each member is enti ed is called hisshare, therefore mernbers of ajoini stock company are knolln as shareholders and th capita ofthe cotnpany is known as share capital- The 1o1al share .apital is divided irlto a number of unisknoq,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 ofIndia Lin ted. Ponds lndia Liruited etc.

The companies are govemed by the Indian Compaoies Act, 1956. The, Act defines ecorDpany as ao.artificial prson qeated by law, having separate entity, with perpetual s.uccessionand a common seal.

CEARACTERISTICS:

1. Artificirt Person: A Joint Stock Compa.ny is an artificial person in the sense th8t it iscreated by law aDd does Dot possss physical attributes of a oalural person. However, it has alegal status.

2. Seprrate kgrl Entity: Being an artificial person, a compiMy has an existeDceindetrendent of its membels. Il can ovrl property, enter into coniract &rd conduct any lawfirlbusiness ifl its own nam. It can sue and can be sued in the court of law- A ihfuholder cannot beheld responsible fbr the acs of tie company.

3. Common Seai: Every coinpady has a common seal by whlch it is represnted whiledealing with outsiders. Any document with the common seal and duly signed by an officer of thecornpany 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 ofitsmembers.

5. LiD,iied Liabiiiiy: Tir iiabiliry oi a member of a Joinr Stock Company is limiteo uyguarantee or the slrares he owns- Ia other r*ords, ia case ol paymeni of det*s by the company, ashareholder is held liable only to th extent qfhis share.

6. Trarsfer.bilify of SharB: The membeB of a company are tee to traflsfer the sharesheld by them to anyone elsc.

7. Formatiol: A corryaty comes into existeoce only when it has be< n registererl a$eteonipletifig lhe formalities prescribed rvder the Indian Companies Acf 1956. A conrlnny is

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lbrfied by the initialive ofa group ofpe$ons klown as promoters.

-8. Membership: A company having

e minrmrln memhersh;p (,frr.o persons and maximumrn) :s lnowr o a privare Iimircd /.omp.n). ur: ;" .^.-"i."'irUfn Jr,,r.o ,,"*0""r. ,u"ininrum is sevee and thc maximum iuelubership is..rnlimited,9. .l}lanageElenti Joilt Stock Corn

tr,o.,er, tr" .r,i."r,ora";*" *"Iil:ff[:,ll;fi:;:fi lnx"ffi:fiLffi:::,ff:[ffi"$;:J,:".:' rhe company is manased b; ;;;";";;;,:.",il,Jj] .r.n"*nro*"

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

l. Limited tiabiliry: In a Joint Srexrenrof shardsh"rG,h",""il;.1#.:"J,r#l:H#:I"f Jff *tr;,r:rf r:ilTlill;Jrl."lLti,cornPanJ

to mise hu*' *'i' '"**",i,#*i'riiiliitv,u "o-p-y i". ,2.CorthuityofexisteDce:Acompanyisan_anillcialpersotrcreal,edbylawandpossesses;T"fi:fflJJ:X;:ff; Ir is nor atrectei ul. *" a"",i . 'iJ,'*", "*1lli,1',"".0*'.** n

3. Belelits of large scale operatii[r: It is orry the company form of oiganisation which_an provide capiht for large scale oDemtions..lr resulrs in large "*i; o;;;r, coosequently1f1;ffi,H:.*"

,""mciency

and reducrio, , *" ".".iil*iil^.,i,olii'.,. o** *" "**

5. Social Benefil: A joinl stock corIr raciritares promotio, J ;;;ffi ill;H.""T3ffi#T;,#::::.J#:.;it also dooates money for education. heaand social irstitutions dth, corninunity service and rsndeB help io charitsble

6. Research and Development: A

1i,dvelaEentf".l;p;;;";-p;;,:.,r"HffitlT#ff#,ff "ffifi ,;_Tjoduct$, improving quarity ofproduct, new ways oft aiiling its staf. etc.

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DISAT,VANTAGES:

l. l onnatiol is rrot easy: l'l1e foil[aiior r'rf a company invoiles compiia[ce Bith anumber 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 th6Board of Directois. This may be due to lack of interest on the part of the shareholders who arewidely dispersed; ignorance, indifference ald lack of ptoper and timely information. Thus, thedemocratic virtues ofa company do not really exist in Factice.

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

4, Eacessit'e governn ent cotrtroli A company is expecled to comply with the provisions ofsveral Acts. Non-compliance ofthese in'yites healy pnalty. This affects the snooth functiordEgofthe companies.

5. Deley i-n Policy Decisiors: A company has to fulfillcertain procedu-al fonnalities beforemaking a policy decision. Jhese fonnalities are time consumirrg and, therefore. policy decisionsmay be delayed.

5. Soeid abusesl A joint stoek company is a large scale business organizationhavilg hugeresources. 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 ir gening._rheir, work done; exploidag workers,corlsuniers and inveslors.

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:rcialrcso&ces artd manpowet. It is also prefrred whea there is iieed Toi priiissional managimerii-and flexibili:y ofoperations. Il certain business like banking and insuance, business can odv beundertaken by joint stoek companies.

10. What is meant by Co-operative soriety. Writc lhe objectives and varkrus typq3 of Co-oprative society.

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

of iis ob.jective. the ao_operalivcs are

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lbrmed primarily to tender sewices to its members. cielerir], it arso provides som sen,;ce to ihesociety.

The m3in obie.tives oj'co-operilti r .oLi, t) .,, (:(a) renderirg service tather than eaming profri, ,(b) mutual help instead ofcompetition, and(c) selfhelp in piace ofdependeoce.

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a) Cotrsumer co-operatiyes: These arc formed to protect the interesls ofordinary consumers ofsooiety by making consume. goods available at reasonable prices. Kendriya Bhandar ilr DelhiAlaka 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 producels- who lirceproblems 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 erimhateexploitation by the middlemen whiie rnarketing their prcduct. Kashr,ir Arts Emporiurn, J&KHandicrafts; 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, comeuDder this category.

f) Fcrmitrg Co-operativ(s: These are formed b1 snrall farmers ro carryon work jointly andthereby share the bnefits of large scale farming. Besides these t,?es, otler co-operatives ,an beforrned 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 co-operativo 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 aodthe maxioum number is unlimiled. At limes the coopcrarives afier their formatjol fix amaximum membership Iimit.

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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 jcinrsiock 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 renderservices 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 ExecutiveCommittee to look aftet the day to day administratioo and the said cornmifi is resporsible torhe general body ofarembers.

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

- 7. Rctum oo capitali fhe return on capitJl subscribd by ihe membcrs is in Lhe form ofa fixedmte ofdividend afler deductibn from the profit.

3. Open Mcmbership, Therc is no Esrriction on aay individual to be a mffrber ol1 co-operalive.

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

5. Middleman'r Protrt Elimilatcd: Through the co- operatjve *r coosumers contml leirowa supplies od by this rlreanrs the Bliddlema&,s

Itlofitis

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on" f;,:.Iu"r*"-"",:A co-operative functions In a democratic mar,ner. Each member.has only

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

DISADVANT GDS1. Limited Cnpital: The aoount

rrccause or the,.*l",.ro,'"-#r,'r'"::r;::T" T;:;i; Jffi :1."::,rffi::1: ::"Ifl,:l

peopie.

--2. Piobrems iD Managementi Ge[eralry it is seen that co-operative do not functionefficiently due io lack ofmanage.ial taleirt.

, 3. Lack of Motiv.tiou: Co-operatives are formed to rcnder service to its lrembrs tharr roeam 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.oooufitydifferences, ego clash etc.4. Lack of Secrecy: Maintenance of business secrecy is one of tlc inrporiaDt factors for thesuccess of enterprise which the co-operatives always lack.5. Dependence otr Govemment The itadequacl, of

capital arrd various other limitatjonslnake co- opratives dependant on:the govemment for support and patronage in tenns ofgmnts,

When the purpose of business service *lan to eam profit alld to prcmote comrr1oneco[omio interest, the co- operative society is the only altemative. Co-olemtives arc alsopreferred as it is easier to mise capitar through assistance t * n"*aJi""iiirri.* ""iovemmenr. Genemlly it seems that a co-opemtite society is suirable for small and medium sizenyrarions. 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 illustriousexceptiolls.

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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 mcstofthe counlries, Stale enterprise is an undenaking otwed and controlled by the local or state orcentral goYernment, for the welfare of thc public at large. Either whole or most of the invelurentis 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 pople and help in creathg an

eaviror^rnwi for induskial acrivity.

I . Hclping dl rorEd hdulrridb.tioDPdvate enteprEnurs will invest only in those industries where prcfit eaming clances are

rnore. They Will trot Ltvest in an uodertaking where Fcfits are lov ineErcctive of its utility forpeople.

2. Developilg Beric hdustries

Certah balic industdes likc iron anC stecl chemicals are the rnost c{rmmon essntials forcconomic g'owth. They must bc dcvelopd only as state managed units.

-3i Estrblilhtng Etrtcrpri . -Requllt I{e.yy irvestncntItr 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 fieldsand ctablished.

.1. To ruD Moropoly Scctor

Sorne i[dustds .are io.bc developed only in public sccror. The indusuiee likc defencc,nuclear enelgy, etc., Caflnoi b lcll in Frivate sctor.5. Proyidc Necssitig

Govemment undcr take to provide vatious necessities like electricity, water, coal, gas andtrdnsport facilities to th pcoplc. So public ulililis arc provided by govemment undrtakings.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

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(vi) Division ofprofir

(vii) fbxibility of operations(viii) Stability of business

(ix) Legal procedure.

Commission in lndia spends huge amount for linding oat new sources ofoil aird gas.8. Making for the Employmert

The state by proper centralised planning o{ industrial development.cari aim at nct cnly fitlemploymelt 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 thedevelopmeat of the economic schemes of mtional importance and spent on social .*,elfareschemes.

10. For Btablishing Socialistie pattertr ofSocietyThe 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 of business (small. medium, large) rnd the market area

served (local. rurjonal, inlernational)

(iii) Finarciat requiiements for starting and ereooding business(iv) Degree ofdirect control desired bv o,rners

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 anddist 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:

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1. Capitalisnr

2. Socirlism3. Mixcd cconomy

I. CAPITALISM* Capitalisrr is ar economic order in which all the tesourcs are owned by private peopie.& This productioa is done only for p,rofil-{, There will be no interference by the govemment.

l SOCIAIISM* In a socialistic syster the resource$ ate o$ ed by the stat .* The prodwtior and disbibution ofgoods \dill be done for the welfare of tbe pcople

and not for the piofit ofthe individuals.

+ Alt factories aad fims will be nationalized and prodrrtion witl be done ia the publiesec10r.

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 isscope for private propert), proft motive and private sector. At tbe same tioq the

, govermElrt plays its role as a socialislic oft with the public sctor.

CL$.c{erbli. of hir.d cto.onv:

l. Erldeace cf PriYrt. cEd Puhli. S.rtorrIn mixed economy. the p.ivde sEc{or drd lhe pubiic sc o will exist side by side.

Pdvate sector is .lso a part ofthe ecqqomy-

L It i a PLnned DcoDoniyTheie will be a planning authoriiy dlocafug the resoruces betweea private aid public

secior-

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a3- Features ofCapitalism anrl Socialism

. In_mixed econooy; the profit motive and sccial interest will be blended. At the sametime, pubiic sector industries will be mn for the welfareof a count;.

- *"""" '

Qiya:allrgrql. Mixed ecorromy is a compromise of capitalism and socialism. The economy msy lrave thedefecls ofthe two systems.

?. Mixed economy niay not remain mixed for a long time- Slowly the public sectqr will swallowthe private secror.3. Since the ateas ofprivate and Dublic stbe workilg. " ncctor 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. primary fimctions2. Secoodary fu[stions

Primrrv fuuctionsl

in Rupeeg Dollar and pound Sterliag iu Indi4 the USA

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J

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

Srcondary fuoctiong:

l. Motre) as a Store ofValue

4 Peopte hold their assets io several lorms like buildiogs, gold machinery and .la*i rvhichare.called physical assets.

a FiDancial assets are also held as investmeds for the futule. people hold money as an assetbsause it has the chfiacteristic of store value.

2- Money as a Strndard of l)eferred Peyments

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

tr7. r#hat are the importsnce of moEey?

l. fvloney Promotes Slingg

* The use of money as a stme of vzlue promor"" *uirrg" arj ul* iorestrnenl- Ihe growthofsasiogs 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 i,foney as a me.lirrm oiexctrarrge and as a rommon measure ofvaluc, cor,lributes l.oexchaoge of goods aad services and growth of t-ade ir an economy.

3'. Muimises Pmfrts and Satisfectkrn

. . r* Using money as a measurilg scale. people.cornpare&egojs and servic,es.they purchaseor sell.

* It govides aa opportdaiqi to th consumer to corhpare the relafive prices of goods andihe expecte

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TYPES OF BANKS

l. Comn errial BrnksThe 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. _1 . They require long te(n loans for purchasing land equipmeats, etc.2. 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

These are s.pecial rypes ot bafl-ks which spaialize il financing bank trade. Their mainimcdor is to make international payme'rts through the purchase and sale bf exchange bills.They eonveft hlme curenoy into lbrci$ curleiEy aDd vice versa-

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

of big iodusrrial coocem

5. CEtrrI Brnk

Every cowrtry in the world has a cenrral hank, which occupies a pintal prrsition in themontary and bafiIing structure ofthe countDr.

6" tndigeoous Betrk

Ll.ii6enous banl( is a person or a firm which acce?ts deposit& transacB businss inhuDdies and advances loans, etc. They are known as Mhajan aftI Sahukars in India.

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 exltrds loans to the households rbe firms aad the go.r,emmeri.

The accepting for the purpose ol lending or inveshoen deposits of morey &om thcpublig repayable on demand or othrwise aad withdmwat*e by cheque, draft ordei oro6crc.ise."

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r'Characteristics of Commercial Banks

rl Repayable on demand.

"i B,v'. using cireque withrirrrwable.ti For the pupose ofinvestrnent fiom thc public4 Fcr the purpose oflending to the public.

21. Discws the vrrious fi:nctions of Commercial Banking. (May/June 2012,2013, NovlDee. 2012)l. Acccpt trce ofDeprNia: The comne.cial baDks accepted three t,?es ofdeposits Aom the public.(i) tr ed Dcpolit Accourt

Mooey i this accouot is ac.apted for fixed period, say orte, two or five yeqrs. The moneyso deposited cannot be withdraw before rhe expiry ofthe fixed tem.(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 carruse cheque faciliry to wilhdraw money from this accouut. ffre rafe ot :nterest ofthis accoult islow.

(i) Caih CEdit

The bank givos loans to the bollowqs agaiEst ae.tail secudty. The bank operls eacaount in the name ofthe debtor and allows him to withdHw thg money fiorn titue to time.(ii) Ordinary Loans: The bank gives loans.to.ry1on or a firm against soqre qg_cq4ty........,

pderdrafi: The

bank allows few ofits customerc to overdraw their acco,.lIlrs tbroughcheques .

3. Itrvertlne.rt of FunCs

- . Comrnercial banks also invest a part otits surplus fi.uds in the govemmeot securitiesand gain interest of them.4. Purctase aind Sale ofForeigr Erchatrge

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

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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.

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

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

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 thecomxaafcial 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,. theR.escrue Bank of hdia is India's CeFtral Bad and also the monettr), aulhoriry.Alfilidimfbi{niftfiirictions ola Coual Bank have beeo entnxred to the Reservl B [:of.lndia-,." .- '-

Fufictioa ol Central Bank

l. Monopoly ofNotc Issue4llleCentralbat*isihesol.eauthorityiortireissueofcurrerrcyinIrxiiaothetthanorre

& The design offlots ofrarious denominatiom issued by the bank have tu be approved bylhe Ceot-ral Covernmest.

4 The RBI has a separate lssue departrnent which LS enhusred wih the issue olcrrrreocyDOteS.

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

{ Tbe systeo as h exiss today is krown as nrinierm reserve sjatD

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2. BrlEker to the Govemmettt+ Ihe RBI is agenr ofCentral Gr

exceptinsthat ofJamr, "ru ;::llll'' "d

if alJ ( entral covernments in India

+ The RBI ha5 rhe obligation to trulsact govemme[t busillcss viz., to keep cash balancess deposits ri.ee of intcrest to recejve anl m"k.;;;;;;;r;; ffiiiJiL"rou.-,n"*nd to carry oul their exchange remiuances a,,u'"ii.rianirl*"*""r."r.l The Resewe 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 toanage public debt.

ilThe.

Bank ma&cs ways and mcan advanc.es to the Govcmment for 90 days. It acts as 8nadvisor to the coyernment on all monetary and b;;;;;;' ^ ""$ The Cental Bank aots as adyisor to GovemDlent rct ody oo bar*ing and financialmaflers but also orl s widc range_ ofeconomic lr.u". lrafuaing Uora-ln*tr," n"ra oflaDdog and resoulce mobilisation.

3. Banker's Baok

+ The RBI acrs as thc banke/s baok.-l 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 if*ii""iffi uiff, "rxchauge.+ All banks should kcep a pan oftheir deposits with the Celral Bank.It is called carhrcservc raiio.{ This ratio enablcs to cootlol the issue ofcredit. The cash reserve ratjo at presnt ir Indiais l5%. with the cash rescrves, the cenkal Banr .*;i;;; ;"'rdjrent uetwecnthc comrnercjal banks for clcaring their aheques, etc,{' sinc RBI ahvays herps othe banks in tirnes of ba,king crisis, tlre RBI bccomes thclender offte last rcsort. '

4. Cusaodisr ofForeign Erchrngc Rcservc{ The Reserve Bank has theEsponsibility to maintain the ofhcial rate ofexchauge.+ Afrer Lrdia became I member ofthe IMF ill I946, RBI has $e rspoDsibility of' maimaining fixed exchange m&s with all o,f,". ^.r*. "o*i., ffiffir.{ The Bank is arso cmpowercd to buy and sell foreign exchange riom and to schedule.dbanks in amounts ofnot less thsa rlte equivalent oiRs. I H;. ---'-

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& The primary objeclive ofthese coDtrols is {o rcsldct the dernand for foreigl exchangewi',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 ofcredit in the countr-v-

t The Bank has nade use ofboth taditiooal or quardlalive metlods ofcredit contol airdseleclh'e or qualitative coahol.

Every batlk has to get a liceose Aom RBi to do banking business within Indi4 the licensecan be cqDcausd

by the Reserve Bank ifcertain stipulaed conditiors are nor fulfillsd.Evry 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 corral bankIt also has power to inspect the acmunts ofany commcrtial bar*.

{

-**4

6. ODGD M.rket OperatioE

* The cefiBl bank deals with the seurities 3rd oth6 near nronies.{ Ilit slls srurity cash flows inlo lhe Central Bank

ardreduces rhe

availability ofcash inthe hands ofccmmercial banks advancing ioans, this causes contnrciion of,iredit:

I tUhien dre c&*ial trhkstuys tht :ieiiEitidq cash- fl

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d Tle Bank has also taken initiative lbr lvidening tecilitics for the provision ofiiniince fortbreign tftde and "industial fir|ance .

9. Cash Rcscr.ve Ratio

4 The uommercial baruis are expected to keep a ccrtaiD percentage of their deposits witbCental Bank. It is known as cash rcserve ratio,"i Ifthe ratio is in$eased, the quantity ofdeposit available for lending is reduced.tl Ifthis ratio is reducad, it increases rhe abiliiy of the banks ro clcare more qedit.

10. 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.

23. Write the role of commercial balk in ecooomic dwelopmeal1. Acclleratirg the Rite of Capital Formation

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 acqlisition ofcapiial goods out of such funds.2. Provision ofFinance and Credit

Commercial banks ate a very imponant source o[ finanoe and credil tor irrdustry andtradre. They help ill aoDcludilg defened paymen{s arrangemerts between the domestic irdustrialundena.ldng fid foreign firms.3. Distribution of Futrds behyecn Regions

, .The commercial barks operate primarily lior profits. Their profirs arewbcn lhey lend lunds for more prcductive uses.,_ TIIe commeraial bad.,s to procss- of .lunomjc development is rhat rlrey help in properallocatior of fllnds arnoDg diffe.ent region Thus corrmerjal bruks ";-;; ". ergines ofbalanced development in the colrntry.

4. Developilg EotrepretreursBdlrs \E e assimed rll- _^r^."*'"*By g";;;'ffiLff*liLdlk rc.F

maximised only

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the grorving ertrel]renel]fi .

5. Extension ol th Size of IUarketCommercial 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 inretation to the taryets lsid down in the five year plans and eosures the supply of erdit todiffeielrt sectors.

MF,THODS OF CREDIT COMROTI

1. Open Markct Operations

* Opetr market operarions refer lo th sale and purchase ofgold related securities and o'Jrersecurities, bilts and bonds ofgovemment by the RBI ftom and to the public andinaocialinstitutio .

2. B.nk Rate Policy

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

"t lvherr RBI sells goyernment scrrities in the marke it withdra'$,s cash reservss ofcornmerciai banks &ereby limiting tlrir credit creation cqpacity.

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

'i& Tte bank rate is the rate fixed by the Central Ba* at which it rediscormts fi61alas$ billsofexchange and goveomert secutjties held t'1, cofimercialSanks.

Jf This rate has beea used to irJhleme (i) availabii;i, d l (ii) c.ost ofcredir.* An increase in lhe Bank rate will encourage batrks in debt to tbe reserve bank to rcduce

fte debt.

{ A reduclion in the I}a* ra1 will ma}.e it less expersive to borrow reseryes.a This is likcly to re$it in tlie prchase of secruities and an iucrease in bank dcposiis by

banks who are witlinglo

lliflowleserves at the lower diseount Iate.

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'I To overcome lecersion iD l( econoi,ccu" ng Lh. bor-k rrle,r rii*;""'"n"

olllslarled lollowinP (heaD mnnry poticy b)onMffch)01L nAprrl I9q7andsrbsequentlyb,"taresru7fer"cnr

.{ 'Ihus thc bank ratc ha,l uot been used{L Irisonryinthe r9g0s and r990s. tha

at 3n insTnroent oforedir control dll l97i'or dear mooetary policy.

t its proper use has been raade in the foim ofcheap

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 depositsofhree maturitv slabs oruet ctoice suiyect to;;",',* iltil|?;e hot exceeding 13{ The minimum period of relm deposits has beeo gradually re.duced &om 46 ro 30 dxys.,{. Ierm deposit rates oa NRE

domestic rBtes._ accoults wele also rationalised in accordance wilh the

(ii) Letrdiry Ratq

+ ln September 1990, the RBI rarionalised the lending mtestnrchfe ofcommercic.l baoks." .a 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 ofommercial banks.

4. ChaEgs itr variable Rescrve Ratio(i) cash Rserve 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 banksin 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 tie unsuccessfirlby ircreasing t ir Iiquidity power through the ,"t"

"fg";";;"r-;;;*.-***-

* The advaatages ofSLR are tbar by implemenring ir alolg with CR& it controts theliquidity of banks and thereby rior;ts rheir poweri" ."u;;;;;;;e ard industry.

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6. 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 receivingfiesb-deposn.q +,Lding up of the bank. t. -4 --,....--......., .,"

5, Sclecfive 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.

il The method ofselective credit conhols was introduced in Ildia by the RBI in May 1956.Under this-

(i) It fixes minimum margins for advances against securities for bai*s. There margins arefrom 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 crta}r kinds ofadvances by banks.

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

* This selective credit conhols retate to such commodities as conoD. wheal, ric, vegetsbleoils, sugar, pulses and cloth.

7. Moral Su,ision

* Periodically letiers arc issued to banks urging drem to exercise conhol over credit iageneral.

The Reserve.Baok has beeo able to build up good relations.wifh conrmercial balks:Ttre rDajor 20 lndiao sclredules coomercial ban*s should enhance rhe risefutness of 6isinstnrment.

24. What is neant t,y moEetary potricy? EipIfi tbe Rcseri baDk,s monef*ry poli(y ofE onth with shbility.

Rexrve Balt controls and rtgulales lhe money supply in our courtry. Money npplys8.nqy consists of currenc ' moeey and credii mone), in cLculatiad. Gl behatf of thegovcfEmenl Resewe Baok '[rttoduces monerary measures to anain the macro ecoromic aoddtlror goals ofthe cordtry. l

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'AnJ \onscious acrion undenaken hv,h- ^. .^^,^_dviitJbitir) or cosr oi'mnncv,. - n,"rt?#rfi "''"trary r'rrhorilier ro changc rhe q,r:inrir)

Ohjectives oI MoDetary policy

(i) Full enploynent

(ii) pdcc slabitity

(iii) Stimulating economic growth

(i) Full Eoptoyoetrt

4 Full employment refers to the siettrciently enployed.

tuatioo in whichall emPloyable rcsou.ces are ftlly and

.4 Prc-f Kcynes suggests increasinfirliemployment,

g ofconsumption alld investnent expenditure to reach

(ii) Price Stabitiry

{L price sability enswes cer.ain adv.rntages:

,- (i) It enables money to functioD as a store ofvalue and a standard ofdeferedaytneDts 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 CroflhEccnomic growt} isindicared bv iocrcase io CNp and percapila income. Ultimatelyrandard ofJiving is raised and inequalities of incorne reduced. sui*J,l r"*oo ,,", ,r,ssocialion with fiscal policy, sustaias rhc pro_o,jon ol".;;;.];;;il:"**,

RESER-Va: BANK'S MONETARY pOLrCy OF CROWTH }VITH STABILTTY* The deveioping countries like Ildia suffer fiom ihe undcr deverp_"o, ,** *Ohronic unemploymeal. For this, the expansion in the rate ofinyestoEntjs nwded* ln odcr to ensure growth rirh *.0,,,y,..*" R:.:rve Bank oflndia has belr following aolicy ofcorholled crcdit expansion. it.has triea ," U,f,rgli.* rf," i"plp"rate degle ofoneta.ry expansion to meet the*Reservebankorrod,"*,,"0;'::;1:H:ffi::::;I;;:,'#;,"

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holding ofesseltial comnlodities i order to contrcl exeessivc risc ir their Frices.'lhr

esserce ofBonetary malagemeDt by tile Reserve Bark has bcen adjusted the paceof monetary expansion in keeping *ith the changing requirements of the economy.

EXPANSIONARY MONETARY ?OLICY ACCORDING TO "KEY]YESIAN YIEW"il Keyne was one ofthe sconornists who dirccted their efforts not only diagnosing the

ailments ofthe economy but also in prescribing riglrt remedies for them.

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

* The objective ofmonetary policy not only to cure booms and deprcssions when they havealrcady 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 ofexpendituie in the coDntry-

tL. trn order to cure uremployrent, lhe moretary policy should aim at

l- Expanding consumption (C) expenditure2. Investmerf (I) expenditure

'l 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 llowofthe trade cycle and bring about equilibrium between mvings and ineestnEtrt at thepoint 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 largerBser group. A person with a paJrsreot card of any kind is part of the retail paymelrt systeB. At theFlail level mosl hansactions involve cash, cheqlEs or cards.

t. eisL is the prcfeired melhod bt small papuents because it involyes no credit atrd thelcfor.-ro ;norrbes. With cas\ you can usually purchase goods and services easily as it widelyacccl[ed, Carlyirlg too nuch cash is risky as i{ can leid to trheft eDd other problerfts However,

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people still cary cash for its convrransacticlrsitrecompl"r".lia^"6;u,.lll',e.and flexihilit). FIom thc p,r-veir's po;Dt of vie\r,,2. cheques a cheque is an order t--iy

and this casir cr:r be re-used tbr oth;r bansactiors.

ps).ee. ehcgues tuc g*".oiry "ai6 ,i1.'1Lll1bi Tnis..fiomthe

paver's hank to the uccount of fierradilionallv 0"n.,*i* al,r" i",tur':rr months atier thc dare uf issue. t he use ofcheques has

,nsr,un,cr,rs. cheques ,cmain a]1 ,,"Jlili]ilti;r'l:::i::jn"^r:l:l*nrerrrof urher paymentpromise ro pay the amounr

"tut.c o, rr -a',.-";; ; #;;:;:::;.;,:Ti*,-:".n:li:il"fiT:aymnt. Cheque cleaxance usual,y takes J - q ,aorking Oays.Advaplages

* Safer.rhan cash e.g. a crossed ,* Preferable for rarge amounts

que can or y be deposited into the payee's ac'ount'

sums

ofcash.- and a large 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,". has sufficierf *0" and * the cheque rnayrl There are extra cosrs if the paye_e wlls.an inunediate ctearance of firnds. Cheques alsoave other administrative costs associated ro it.

3, Debit Card - is 8 payment card wberc tl.rc hTsltion amount is deducted di.ecfly fro_ ti,eard hotder's bank accounr upotr authorizarion,;;;;-;::::I-::,*"i,*.A-,,M cari

.can;;;;^,ffi ,H#*:,;il*"Ii#"fJtr ; rH:ffi:H:,:Hommercial banlc are il the prq*ess of i

arlow ['e public lo use any o"*., o"Lli^1T*]"ialEfrPos interoperabiiitv io Fiji. rru--s will

completed in a few month"o" caro at anJ' EFTPoS machine This project will be

Advartaqg

{F Card paymenrs will only be accepied if rhe card holder has sumcient funds in hisibcrccounl* Can be used tor mail ordcr or onlioe purchases.L Less risk than holding cash. TIre sk oftbcft is mirigated bylaviog pi+eodes.

Disadvatrtaseg

+ Takes up to tluee days for money to be received aad acknowledged.4 Operared at a fee payable to fte bant.

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J, Credit Card - erabies its holder to buy goods and srrvices with a credit li e given by credilcard issuer. Funds are seltled at a later date- Cerd holders ore billed on a monthlv basis and bearfinancial 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

4 Guaranteed palment Ep 10 m approved limit.rl Can be used for rnail order and onliue puchases.

Disadvautases

$ A fee is paid to the banl for this service.a 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 providesaracunts and dates oflhe pajnlrolts. This facility cao be used for paying diffqat alnbunls add is.usefirl for paying regular bills..

A&rpt{ges

'l Businesses are guaranteed payrnent.

fl Customers don't have to remembei pavmeDt dates.a Cugomef,s don't have to w te cheques.ed pog [hem,. L Businesses cae change aoorrrtt and paymerf dates

DitrdY.rt ses4 Monies are paid ein if there is no money in the customer,s accour . ?herefme

customer can rlcur a barik overdruft at a high iatffesr rate.the

S&trding Ner - itr this facility mo{ey is tr"mfened auto&arical.Iy &om lhe custome.,sacerrwlffiregEtar 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 maynol 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 xBrNfbrring finds from yonr savings to current accoofil or to a third party account..i*{a*tseg

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

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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 eservice provider, to perforrn cormon baDking tlarrsactions. An active baEk account is nesdodand a mobiie phone equipped Mth features required by the bank.Advaatags

* Secrred to easure llser fudbmation is available anytime.* Fast and convenienl.lL Payments mai be made from anywhere that has your mobile network coverage.

Dbadvaottss

* 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 otherindividuals tbmugh their mobile phones. Bill payments

andpurchases

of goods and services reamong tle casl ess kansacl:cos tbar uan be made. To enjoj the beneEts-of m"lril" ;;^"y, ;;customer has to rcgiiter and orn alr acrourt with the mobili money service proyidgr. Exanplesofmobile money services in Fiji are vodafone's M-paisa and Dgicel Motrile Mooey. '.Advatrtasc

,& Fast, reliable ard efficieot mobile payments nray be made at any time ofthe day.rl. Colvenient for making payments to and receiying paynrnts tonr people in remolc

IL

areas.

Available in aDy parl ofthe counEy where thereis network coverage.

lhe moblle wallet is protecled by a pin aDd if the lhone is los/stolen your money is sillsafe.