Banking Class 6

Banking emerged out of evolution of money which was the result of limitations of Barter System.

Limitations of Barter System:

  1. Double Coincidence of Wants: Both parties must have what the other wants.
  2. Lack of Standard Unit of Account: No common measure of value.
  3. Limited Economic Growth: Difficult to specialize and increase production.
  4. Limited Geographic Scope: Difficult to trade over long distances.
  5. No Store of Value: Goods may deteriorate in quality or value over time.
  6. No Medium of Exchange: No widely accepted medium for exchange.
  7. Difficulty in Divisibility: Goods may not be easily divisible.
  8. Difficulty in Storage: Goods may be difficult to store.

These limitations of the Barter System led to the evolution of money.

 

Evolution of money:

Different regions used various commodities for exchange like:

  • Gold coins were used as a mode of currency in ancient India.
  • The ancient Aztecs used beans as a trade currency.
  • Norwegians used butter.
  • US colonists used tobacco leaves and animal hides as a form of currency.

Gradually, coins and currency notes came into circulation.

The earliest coins were made in the kingdom of Lydia (now in Turkey) in the 7th century BC that spread rapidly to Africa and Europe.

The paper currency came into being in China during the 10th century.

In Ancient India metal coins were used around the 6th century BC and then Mughals introduced Paper currency in the year 1236 AD.

 

Banking Class 6

Banks and their Importance

Bank

A bank is an institution where people deposit their funds as savings and are able to withdraw the same when required. Thus, bank acts as a ‘vault’ for safekeeping of funds. There are situations when people may need funds more than their savings to purchase high-value products such as cars, bikes et cetera. In such situations, banks also provide ‘loan’ to the ‘deposit holders’.

Origin of Banking

In temples and palaces of Babylonia, banking existed even before 2000 BC.

Ancient Greeks also used a system of transferring money in the form of book entries.

In India real Banking started in the form of the Imperial Bank of India in 1921, that was renamed as the State Bank of India (SBI) in 1955.

 

Types of Banks

Banks can be categorized on the basis of their ownership and services they offer:

Central Bank: The Central Bank is the most important institution in the financial system of any country. Reserve Bank of India (RBI) the central bank of India. It manages the supply of genuine currency notes in the country. RBI also acts as a banker to the government and implements monetary policies for the country.

Commercial Banks: Commercial banks are the banks to the people to allow them open and manage accounts, to obtain loans and other financial services. These include public sector banks owned by the Government and also the private banks.

 

Opening a Bank Account

An individual can open a bank account singly or jointly with a family member by submitting the following documents:

  1. Passport size photographs
  2. Identity proof
  3. Address proof
  4. Opening amount

When the account is opened, the bank provides to the account holder an account number and cheque book to operate the account.

 

Types of Bank Accounts

Savings Account:

The main purpose of opening Savings Bank Account is to encourage the habit of savings among people. It is easy and convenient for common people as they can deposit any amount they want.

It is popular with students, salaried individuals, and senior citizens. Banks allow only a nominal interest on savings account, based on the time period the amount remained in the account.

Current Account:

The facility of an unlimited number of cash deposits and withdrawals is provided to the business owners by means of Current Account. They earn a negligible or no interest on such accounts. In case of overdraft facility availed by the account holders, banks charge interest from them.

Overdraft means the facility of drawing the amount over and above their existing balance for meeting their business requirements.

Fixed Deposit Account:

As is clear from its name, in this case the amount remains there in account for a fixed period usually a long period of time. The interest rate provided in this case is higher than in case of savings account.

Recurring Deposit Account:

As is clear from its name, the amount is deposited again and again usually every month for a particular time period to be withdrawn at the end of that period. It is very popular with student.

The purpose is to encourage the habit of regular savings amongst people. In this case also the rate of interest is higher than in case of savings account.

 

Banking Class 6

Cheque ﹘ an instrument of exchange

Cheques have been the most popular instrument for money transfer for many decades and continue to be important these days also.

How cheques work?

Following will be the steps if you want to pay ₹5000 to Manu out of your balance ₹20,000 in savings account in Bank A:

  1. You issue a cheque of ₹5000 to Manu using the cheque book received from Bank A.
  2. Manu deposits the cheque in his bank, suppose, Bank B
  3. Bank B sends the cheque to Bank A
  4. Bank A sends the amount of ₹5000 to Bank B after confirming the cheque details.
  5. ₹5000 is now deposited to Manu’s account in Bank B, so his bank balance increases by ₹5000.
  6. ₹5000 is reduced from your account in Bank A

Key elements of a Cheque:

  1. Name and signature of the person making the payment/account holder.
  2. Name of the person who will receive the payment.
  3. Date on or after which the cheque is valid.

 

Basic Terms in Financial Literacy

Security and Modes of Digital Payments

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