ACKNOW LEDGEMENT

I hereby express my sincere gratitude to the lord

almighty for all the help rendered in the course of
successful completion of this project. I would like to
thank my Economics teacher Mrs. Simi W ilson for her
constant guidance and suggestions throughout the
span of this project.

I would also like to thank our Principal Rev. Fr. Antony

Thockkanattu and the school for making it possible to
complete this project. I extent my sincere gratitude to
my parents and team of members who have played
an important role in this project.

Thank You.
 CHAPTER 1
INTRODUCTION
Money and banking form the backbone of any modern
economy. Money, in its simplest sense, is a medium of
exchange that allows people to buy goods and
services without the complications of barter. Beyond
being a medium of exchange, money also serves as a
unit of account, a store of value, and a standard for
deferred pay ments. O ver time, money has evolved
from commodities like gold and silver to paper
currency, and now to digital and electronic forms,
reflecting changes in technology and society ’s needs.

Banking, on the other hand, provides the sy stem

through which money circulates and is managed.
Banks act as financial intermediaries by accepting
deposits from individuals and businesses, and then
lending these funds to others who need capital. This
process not only supports individual needs, such as
housing or education loans, but also fuels business
expansion and economic development. Banks also
play a vital role in maintaining trust in the financial
sy stem by providing secure transactions, facilitating
pay ments, and offering services such as savings
accounts, credit facilities, and investment options.

Together, money and banking contribute to economic

growth, financial stability, and social welfare. By
ensuring efficient allocation of resources and
supporting trade at both national and international
levels, they form the foundation of modern financial
sy stems. In a rapidly globalizing world, the study of
money and banking is essential for understanding
how economies function and how individuals can
make informed financial decisions.
OBJECTIVES OF THE STUDY

TO UNDERSTAND THE MEANING, EVOLUTION

AND COMPONENETS OF MONEY SUPPLY.

TO ANALYSE THE FUNCTIONS OF COMMERCIAL

BANKS

TO STUDY ABO UT THE CREDIT CREATION

POW ER OF COMMERCIAL BANK.
RELEVANCE OF THE STUDY
The study of money and banking is very important in
today ’s world. Money acts as the medium of
exchange, and learning about it helps us understand
how trade and commerce function. Banking shows
how savings are turned into loans and investments
that drive growth. It also teaches us about interest
rates, credit, and the role of central banks in keeping
the economy stable. For individuals, it improves
financial literacy and helps in making wise decisions
about saving and investing. O n a larger scale, it
highlights how banks support businesses,
development, and international trade. In today ’s digital
era, it also explains the importance of online banking
and digital pay ments. O verall, study ing money and
banking builds both personal financial security and
economic progress.

METHODOLOGY
To study the topic of Money and Banking, a
sy stematic approach was followed. The study began
with a review of secondary sources such as
textbooks, academic articles, and reliable online
resources to build a basic theoretical understanding.
Government publications, reports of the Reserve Bank
of India, and financial news articles were also referred
to for updated information on current practices and
policies. Finally, the findings were compiled in a
structured manner to connect theoretical concepts
with real-world applications.
LIMITATIONS
Recognizing our in experience, we acknowledge
potential short comings in our approach.

[Link] entire details could not be covered thoroughly

due to the projects broad score.

[Link] timeframe provided was severely restrictive.

CHAPTER 2
ANALYSIS OF DATA
MONEY AND BANKING
1. Meaning of Money

• Money is any thing universally accepted as a

medium of exchange.

• Functions:

o Primary –medium of exchange, measure of value.

o Secondary –store of value, standard of deferred

pay ment, transfer of value.
• Ty pes: commodity money, fiat money, fiduciary
money, and digital money.

________________________________________

2. Importance of Money

• Simplifies trade and eliminates barter problems.

• Encourages specialization and division of labor.

• Facilitates saving, investment, and capital formation.

• Backbone of economic development.

________________________________________

3. Meaning of Banking

• Banking refers to activities of institutions that

accept deposits, provide loans, and facilitate
pay ments.

• Includes central banks (monetary authority ) and

commercial banks (service providers).

________________________________________

4 . Functions of Banks

1. Accepting deposits (savings, current, fixed).

2. Granting loans and advances (personal, business,

industry ).
3. Facilitating pay ments (cheques, drafts, UPI, online
transfers).

4 . Credit creation –multiply ing money supply

through lending.

5. Agency functions –investment advice, insurance,

bill pay ments.

________________________________________

5. Role of Central Bank (e.g., RBI)

• Issues currency.

• Controls money supply (monetary policy ).

• Regulates commercial banks.

• Maintains financial stability.

________________________________________

6. Importance of Money and Banking Together

• Money makes trade and exchange possible.

• Banks ensure efficient circulation and utilization of

money.

• Together, they support economic stability, growth,

and development.

• In modern times, digital banking and e-money have

transformed global finance.

MEANING AND EVOLUTION OF

MONEY SUPPLY
MEANING OF MONEY SUPPLY
1. Introduction

Money is the lifeblood of any economy, and its

availability determines the level of economic activity.
To measure this, economists use the concept of
money supply. Money supply is not only about
phy sical currency but also includes demand deposits
and other easily accessible forms of money that can
be used for spending. Understanding money supply is
important because it influences consumption,
investment, inflation, interest rates, and overall
economic growth.

2. Definition

In simple terms: Money supply is the total stock of

money available with the public in an economy at a
given point of time.

According to RBI, money supply is the currency with

the public plus demand deposits with the banking
sy stem and other deposits with RBI.

It excludes currency held by the government and

banking sy stem, since that money is not actively used
for transactions in the economy.

6. Conclusion

The money supply is a vital measure of the financial

health of an economy. It is not static but changes
continuously with economic activities, banking
operations, and policy measures. By regulating money
supply, the central bank seeks to balance growth with
stability — too much money leads to inflation, while
too little money slows down development. Thus,
understanding money supply is essential for grasping
how modern economies function.

EVOLUTION OF MONEY SUPPLY

1. Introduction

The concept of money supply has developed over

thousands of years in response to the needs of trade,
security, and economic growth. In its earliest form,
money was not a phy sical object but a sy stem of
exchange, and over time it evolved into multiple
stages— from barter and commodity forms to the
highly digitalized sy stems we use today. Each stage in
this evolution addressed the shortcomings of the
previous one and reflected changes in human society,
technology, and economic sy stems.

2. Barter Sy stem: The Beginning

In ancient times, exchange of goods and services took

place through barter. For example, a farmer could
exchange wheat for a pot made by a potter.

However, barter faced major limitations:

Double coincidence of wants: Both parties had to want

what the other offered.

Lack of standard value: No common unit to measure

worth.

Indivisibility : Some goods (like cattle) could not be

divided for smaller transactions.

Storage issues: Perishable goods could not be stored

for long- term use.

These problems pushed societies to find more

practical alternatives.

3. Commodity Money

To solve barter problems, societies began using

commodities with intrinsic value— such as salt, cattle,
shells, beads, tobacco, and precious metals.

Example: In ancient Rome, soldiers were sometimes

paid with salt (from which the word salary originates).

Commodity money was widely accepted and durable,

but carry ing and storing bulky commodities was
inconvenient.

4 . Metallic Money

W ith advancement, metals such as gold, silver, and

copper became the dominant form of money.

They were durable, easily divisible, portable, and had

high value relative to weight.

States and kingdoms began minting standardized

coins with official seals to guarantee purity and
weight.

Metallic money dominated global economies for

centuries but still had issues: scarcity of metals and
difficulty in making very large pay ments.
5. Paper Money

To overcome limitations of metal, governments and

banks introduced paper currency.

The first recorded use of paper money was in China

during the Tang Dy nasty (7th century ) and became
widespread under the Song Dy nasty (11th century ).

In Europe, paper money was adopted much later,

often backed by precious metals (the “Gold
Standard”).

Paper money made transactions easier, lighter to

carry, and could be printed in various denominations.

6. Credit and Deposit Money

As banking developed, credit instruments like

cheques, promissory notes, bills of exchange, and
later bank drafts became common.

These forms of money did not have intrinsic value but

were accepted on the basis of trust in banks and
financial institutions.

Deposit money (funds in bank accounts) became

central to money supply, as it allowed large pay ments
without the need for phy sical cash.
7. Plastic Money

W ith technological innovation, the mid-20 th century

saw the rise of plastic money — credit cards, debit
cards, and prepaid cards.

This reduced reliance on phy sical cash and introduced

convenience for consumers, businesses, and global
travel.

Example: Visa and MasterCard revolutionized

transactions worldwide.

8. Electronic and Digital Money

The late 20 th and early 21st centuries brought e-

money : online banking, mobile wallets, UPI sy stems,
and prepaid apps.

Transactions became faster, global, and often cashless.

The concept of money expanded to include digital

balances rather than only tangible cash.

9. Cry ptocurrencies and the Future

The most recent stage is cry ptocurrency (e.g., Bitcoin,

Ethereum), based on blockchain technology.

These are decentralized, not controlled by

governments, and offer new possibilities for secure,
borderless transactions.

However, they also raise concerns of volatility,

regulation, and misuse.

10. Conclusion

The evolution of money supply reflects humanity ’s

constant search for greater efficiency, security, and
stability in exchange. From barter to cry ptocurrencies,
each stage solved old problems but introduced new
challenges. Today, money is no longer just coins and
notes but a complex sy stem of bank deposits, digital
platforms, and virtual currencies. This evolution shows
that money supply is dy namic— constantly adapting
to technological changes and economic needs— while
continuing its core role of facilitating trade, storing
value, and supporting growth.
COMPONENTS OF MONEY SUPPLY
Money supply refers to the total stock of money
available in an economy at a given time. To understand
how money functions, economists classify it into
different components based on liquidity. The main
components of money supply are currency held by
the public and demand deposits with commercial
banks. These are also part of M1or narrow money,
which represents the most liquid forms of money
that can be used for immediate transactions.

1. Currency Component

Definition:

Currency includes all coins and paper notes held by

the public. It is the phy sical money used in day - to- day
transactions.

Exclusions:
Currency held by the government or banks is not
counted, as it is not actively circulating in the
economy.

Characteristics:

Highly liquid and universally accepted.

Denominations vary to meet different transaction

needs.

Easy to use for small purchases like groceries,

transport, or utility bills.

Importance:

Medium of Exchange: Currency is used to buy goods

and services efficiently.

Measure of Value: Prices of goods and services are

expressed in terms of currency.

Store of Value: Currency retains value for short- term

use.

Convenience: Simple to carry and use, especially for

everyday transactions.

Example:

If a person buy s fruits from a local vendor using ₹ 20 0

notes, it is considered part of the currency
component of money supply.

2. Demand Deposits

Definition:

Demand deposits are bank deposits that can be

withdrawn by the depositor at any time. These include:

Savings accounts –where individuals save money and

can withdraw it as needed.

Current accounts –used mostly by businesses for

frequent transactions.

Features:

Highly liquid because the money can be accessed

instantly through cheques, ATMs, debit cards, or
online transfers.

Does not include fixed deposits or term deposits,

which cannot be withdrawn immediately.

Importance:

Facilitates Large Transactions: Demand deposits allow

people to transfer large sums safely without carry ing
cash.

Supports Trade and Business: Companies use current

accounts to pay suppliers, salaries, and other
expenses.

Encourages Banking: People deposit money in banks

for safety, earning interest on savings accounts.

Part of Monetary Policy : Banks use demand deposits

to create credit, which influences the money supply.

Example:

A company pay ing salaries to its employees through

bank transfers is using demand deposits.

ANALYSIS OF FUNCTIONS OF
COMMERCIAL BANKS
1. Acceptance of Deposits
1.1Meaning

Commercial banks collect money from the public in

the form of deposits. This is the primary function of
banks, as these deposits become the main source of
funds for lending and investments. By accepting
deposits, banks provide a safe and secure place for
people to keep their money while allowing them to
earn interest on certain ty pes of deposits.

1.2 Ty pes of Deposits

Savings Deposits

Meant for individuals to save a portion of their

income.

Earn interest (usually fixed by the bank).

Example: A student depositing ₹ 5,0 0 0 in a savings

account.

Current Deposits

Mainly used by businesses and traders for

frequent transactions.

No interest is generally paid.

Allows overdraft facility for short- term needs.

Example: A shopkeeper uses a current account to pay

suppliers.

Fixed or Term Deposits

 Money deposited for a fixed period at a higher
interest rate.

Cannot be withdrawn before maturity without

penalty.

Example: ₹ 1lakh deposited for 1year at 6% interest.

1.3 Importance of Deposit Acceptance

Encourages public savings, which are crucial for

economic growth.

Ensures safety and liquidity for depositors.

Provides funds for credit creation, enabling banks to

lend money for trade, business, and personal needs.

1.4 Examples in Real Life

SBI, HDFC, ICICI accepting deposits from individuals

and businesses.

Post office savings accounts as an alternative to

bank savings deposits.

2. Granting Loans and Advances

2.1Meaning
Commercial banks provide credit facilities to
individuals, businesses, and industries. By lending
money, banks support economic activities, generate
income through interest, and create credit that
circulates in the economy.

2.2 Ty pes of Loans and Advances

O verdraft

Allows account holders to withdraw more than

their balance up to a sanctioned limit.

Interest is charged only on the overdrawn amount.

Cash Credit

Short- term loan to meet working capital

requirements of businesses.

Secured against stock, inventory, or receivables.

Term Loan

Medium or long- term loans for purchase of

machinery, vehicles, or business expansion.

Interest and principal are repaid in installments over

time.

Discounting Bills / Bills of Exchange

Banks provide short- term credit by discounting

trade bills.

Example: A trader can get cash immediately by

discounting a bill due in 30 day s.

Consumer Loans

Personal loans, education loans, home loans, or car

loans.

Helps individuals meet personal or family financial

needs.

2.3 Importance of Loans and Advances

Supports business expansion and industrial growth.

Provides personal financial support for housing,

education, or emergencies.

Play s a crucial role in credit creation, increasing the

effective money supply.

2.4 Examples

A small business taking a cash credit loan to buy raw

materials.

Students availing educational loans for higher studies.

3. Auxiliary or Other Functions
3.1Meaning

Besides primary functions, banks perform several

supporting or auxiliary functions to facilitate trade,
industry, and individuals.

3.2 Major Auxiliary Functions

Agency Functions

Collection of cheques, bills, and dividends on behalf

of clients.

Pay ment of taxes, utility bills, and insurance

premiums.

Remittance of Funds

Transfer of money from one place to another

safely and quickly.

Methods: NEFT, RTGS, IMPS, cheques, demand

drafts.

Safe Custody

Providing lockers for valuables and important

documents.

Banks act as custodians of clients’ assets, reducing

theft and risk.

Investment Services

Assisting clients to buy and sell shares, bonds, and

government securities.

Banks provide advice for better returns.

Credit Creation

Banks lend more than the deposits they hold (within

statutory limits), creating additional money in the
economy.

3.3 Importance

Facilitates smooth financial transactions for

businesses and individuals.

Enhances efficiency and trust in the financial

sy stem.

Supports economic development by mobilizing

funds for productive use.
3.4 Examples

Banks helping clients pay utility bills online.

Transfer of funds across cities for business pay ments

Locker facility in SBI or HDFC for safe storage of

jewelry.

4 . Conclusion

Commercial banks are financial intermediaries that

perform multiple roles to support the economy. By
accepting deposits, they mobilize savings. By granting
loans and advances, they promote trade, business, and
personal finance. Through auxiliary functions, they
facilitate smooth financial transactions, safe custody,
and investment services. These three groups of
functions— Deposits, Loans, Auxiliary Services—
together make commercial banks vital institutions for
economic growth, stability, and development.
Credit Creation Power of Commercial
Banks
1. Introduction

Commercial banks are not just institutions that accept

deposits— they are money - creating entities. W hen
banks lend more than the deposits they receive, they
create additional money in the economy, increasing
liquidity. This ability is known as the credit creation
power of banks.

The concept is vital in modern economies because it

influences investment, consumption, economic
growth, and inflation.

2. Meaning of Credit Creation

Credit creation is the process by which commercial

banks expand the money supply by advancing loans
beyond the actual cash deposits they hold.

Example: A bank receives a deposit of ₹ 1,0 0,0 0 0 and

lends ₹ 80,0 0 0. W hen the borrower deposits this
amount in another bank, money supply increases.

Credit creation is directly linked to deposits, reserve

requirements, and lending policies.

Key point: It helps in converting idle deposits into

productive capital.

3. Difference Between Deposits and Credit Creation

Aspect Deposit Credit Creation

Money deposited Created by bank

Source
by public lending

Additional money
Nature Existing money
created

Role Safe-keeping and Expands economy

Limitati
on liquidity and investment

5. Mathematical Illustration

Maximum Credit Creation Formula:

Maximum Credit=Initial DepositCRR−Initial Deposit\tex

t{Maximum Credit} = \frac{\text{Initial Deposit}}
{\text{CRR}} - \text{Initial Deposit}
Maximum Credit=CRRInitial Deposit −Initial Deposit

Example:

Initial deposit = ₹ 1,0 0,0 0 0

CRR = 10 % (0.1)

Maximum Credit=1,0 0,0 0 0 0.1−1,0 0,0 0 0 =10,0 0,0 0 0 −1,0

0,0 0 0 =9,0 0,0 0 0\text{Maximum Credit} =
\frac{1,0 0,0 0 0 }{0.1} - 1,0 0,0 0 0 = 10,0 0,0 0 0 - 1,0 0,0 0 0
= 9,0 0,0 0 0 Maximum Credit=0.11,0 0,0 0 0
−1,0 0,0 0 0 =10,0 0,0 0 0 −1,0 0,0 0 0 =9,0 0,0 0 0

Total money supply = ₹ 1,0 0,0 0 0 + ₹ 9,0 0,0 0 0 =

₹ 10,0 0,0 0 0
6. Factors Affecting Credit Creation
1. Cash Reserve Ratio (CRR): Higher CRR less
lending less credit creation.
 2. Public Demand for Cash: More cash withdrawn
reduces lending potential.
3. Bank’s W illingness to Lend: Influenced by
economic conditions and risk assessment.
4. Statutory Liquidity Ratio (SLR): Minimum
percentage banks must keep in liquid assets,
reducing lending ability.
5. Economic Environment: Inflation, recession, or
financial instability affects credit creation.
6. Government Policies: RBI guidelines, interest
rates, and liquidity measures.

7. Importance of Credit Creation

1. Economic Growth: Provides funds for business,

agriculture, and industries.

2. Liquidity in the Economy : Increases money

available for consumption and trade.

3. Supports Investment: Enables purchase of

machinery, raw materials, and infrastructure.

4. Encourages Savings: As banks lend more,

deposits increase, enhancing financial mobilization.

5. Employ ment Generation: Loans to industries and

businesses create jobs.
8. Limitations / Risks of Credit Creation

1. Risk of Bad Debts: Loans may not be repaid,

leading to losses.

2. Inflation: Excess credit creation may lead to too

much money chasing goods.

3. Liquidity Risk: Banks may face cash shortages if

too much money is lent.

4. Dependence on Public Deposits: Credit creation is

limited by deposits and withdrawals.
9. Role of CRR, SLR, and Statutory Requirements
CRR (Cash Reserve Ratio): Portion of deposits
banks must keep with RBI.
SLR (Statutory Liquidity Ratio): Minimum
investment in government securities.
Importance: Helps regulate the amount of credit
banks can create and control inflation.
10. Real-Life Examples

During economic growth, banks increase credit to

industries, boosting production.

Government schemes (like PMEGP) rely on bank loans

for small businesses.
RBI adjusts CRR to either encourage or restrict credit
creation.

11. Diagrams / Flowcharts

1. Credit Creation Cycle

2. Multiplier Effect of Deposits and Loans

3. Link Between Deposits Loans Money Supply

(M1, M3)

12. Ty pes of Credit Created by Banks

Commercial banks create different ty pes of credit

depending on the purpose and nature of lending.
These include:

1. O verdraft Credit

o Allows account holders to withdraw more

than their available balance up to a sanctioned
limit.

o Provides short- term liquidity to businesses

and individuals.

2. Cash Credit

o Short- term loans to meet working capital

requirements of businesses.
 o Secured against stock, inventory, or
receivables.

3. Term Loans / Investment Credit

o Medium to long- term loans for purchasing

machinery, equipment, or expanding
operations.

4. Consumer Credit

o Loans provided to individuals for personal

use: housing, education, vehicles, or
household needs.

5. Discounting of Bills / Trade Credit

o Banks give immediate funds against bills of

exchange or invoices, facilitating trade.

13. Credit Multiplier / Money Multiplier Concept

The credit multiplier explains how banks multiply

deposits into more money through credit creation.

Definition: It is the ratio of total money created

to the initial deposit.

Formula:

Money Multiplier=1CRR\text{Money Multiplier} = \frac{1}

{\text{CRR}}Money Multiplier=CRR1
 Example:

o Initial deposit = ₹ 1,0 0,0 0 0

o CRR = 10 % (0.1)

o Money multiplier = 1/ 0.1= 10

o Maximum money supply = ₹ 1,0 0,0 0 0 × 10 =

₹ 10,0 0,0 0 0

Importance:

Helps regulate money supply and liquidity in the

economy.

Explains how small deposits can create multiple

layers of credit through repeated lending.

15. Regulation and Control of Credit Creation by RBI

The Reserve Bank of India (RBI) regulates and controls

the credit creation power of commercial banks to
ensure economic stability and prevent excessive
inflation.

16. Tools Used by RBI

1. Cash Reserve Ratio (CRR):

o Banks must keep a certain percentage of

 deposits as reserve with RBI.

o Higher CRR reduces credit creation; Lower

CRR encourages credit creation.

2. Statutory Liquidity Ratio (SLR):

o Banks must maintain a minimum

percentage of their deposits in liquid assets
like government securities.

o Reduces the portion of funds available for

lending.

3. Bank Rate / Repo Rate:

o RBI adjusts the interest rates at which

banks borrow from RBI.

o Higher rates discourage lending; Lower

rates encourage lending.

4. O pen Market O perations:

o Buy ing or selling government securities to

control money supply.

o Helps manage liquidity in the economy.

2. Importance of Regulation

Prevents excessive money creation which can

cause inflation.
 Ensures financial stability and confidence in the
banking sy stem.

Balances economic growth and liquidity in the

market.

Example:

During inflation, RBI may increase CRR or repo

rate to reduce credit creation, controlling money
supply.

During recession, RBI may reduce CRR or repo

rate to encourage lending, boosting economic
activity.

12. Conclusion

The credit creation power of commercial banks is a

cornerstone of modern economies. By converting
deposits into loans, banks multiply money in
circulation, support trade and industry, encourage
investment, and stimulate growth. Proper regulation
of reserves ensures financial stability while
maximizing economic benefits.
 CHAPTER 3
FINDINGS AND CONCLUSION
1. Money is a Medium of Exchange
Money eliminates the inefficiencies of barter by
acting as a common medium of exchange.
It facilitates trade by providing a standard
measure of value, which makes transactions
smoother and more efficient.

2. Money Supply Influences Economic Activity

The amount of money circulating in the
economy directly affects inflation, consumption,
investment, and overall economic growth.
Central banks, like the RBI, regulate money
supply to maintain price stability and economic
balance.

3. Banks Mobilize Savings and Provide Credit

 Commercial banks collect deposits from the
public and convert them into loans and advances
for individuals, businesses, and industries.
This process encourages savings, facilitates
investments, and promotes economic
development .

4 . Credit Creation by Banks Multiplies Money

Banks do not just lend deposited money — they
create additional credit, which increases the
effective money supply in the economy.
Credit creation is controlled by tools like CRR,
SLR, and repo rate to ensure financial stability.

5. Banking Sy stem Supports Trade and Economic

Stability
Banks provide pay ment, remittance, foreign
exchange, and digital banking services, which
support smooth trade and commerce.
A strong banking sy stem maintains public
confidence, financial inclusion, and economic
growth.

CONCLUSION
Money and banking form the backbone of a modern
economy. Money acts as a medium of exchange, store
of value, and measure of economic activity, while
banks mobilize savings, provide credit, and facilitate
trade. Together, they ensure liquidity, support
economic growth, and maintain financial stability,
making them essential for the smooth functioning of
the economy.

BIBLIOGRAPHY
[Link]

Saraswati INTRODUCTORY MACROECONOMICS

[Link]
[Link]