Banks and the Magic of Finance Class 7 Notes Social Science Chapter 8

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Class 7 Banks and the Magic of Finance Notes

Banks and the Magic of Finance Class 7

Class 7 SST Chapter 8 Banks and the Magic of Finance Notes

Introduction

• Earlier we have learnt that India’s roads, railways and telecommunication systems help enable economic activities that use money.

• Money earned by a factory becomes workers’ wages, and the workers then spend this income on goods and services. As this spending reaches shopkeepers and producers, the same money keeps circulating in the economy, maintaining a continuous flow of economic activity.
• Money plays a central role in daily life, and people need safe places to keep, transfer, and manage their money.
• Banks and financial institutions help people carry out these money-related activities in an organised manner.
• Together with ATMs, post offices, UPI systems, and the stock market, they form the nation’s financial infrastructure, which enables smooth monetary transactions for people, businesses and the government.

What Are Banks And What Do They Do?

• Banks are financial institutions that provide many services to help people and the economy.

• They help people keep their money safe, manage savings, borrow money, and make payments.
• These services are used by different people such as farmers, shopkeepers, individuals, as well as businesses and other institutions.
• To use these services, a person or business must first open a bank account.
• After opening an account, they become a bank account holder.

Hold Deposits

• Banks accept and safeguard the money people deposit, keeping it safe from theft, loss, or damage. Depositors ca time, and all deposits are accurately recorded.
• Banks not only keep money safe but also pay interest monthly, quarterly or annually, which encourages people to save.
• Banks also lend money to individuals or to business entities.
• Banks offer different types of accounts because people and-businesses have different financial needs.

(i) Savings Account

• Designed for individuals who save regularly.
• Earns interest on the deposited money.
• Allows adding or withdrawing money, with some limits on withdrawals each month.

(ii) Current Account

• Current accounts are mainly used by shopkeepers, traders, and businesses that do multiple transactions each day.
• They generally do not earn interest.
• They allow limitless deposits and withdrawals.

(iii) Fixed Deposit

• A fixed deposit is an account in which money is kept for a fixed period such as six months, one year or more.
• This type of account gives a higher rate of interest compared to a savings account.
• The money cannot be withdrawn before the fixed period.
• However, in case of urgent requirements, money could be withdrawn before the final period, by paying a penalty on the interest amount earned.
• Banks pay interest on deposits, which grows the savings over time.
• Interest is calculated on the principal and the interest earned in previous periods, a process called compounding.
• Example: If you receive ₹ 1000 on your birthday and deposit it in a bank at 6% interest, it will grow to ₹ 1060 after one year, ₹ 1123.60 after two years, and ₹ 2012.20 after 12 years, showing how savings increase exponentially over time.

The Magic of Compounding-The story of a King and a Sage

• Compounding means earning interest on the original amount as well as on the interest already added.
• It makes money grow faster over time and shows why saving early is beneficial.
• A small amount saved over several years can increase significantly due to compounding.
• A king from Ambalappuzha, Kerala, and a visiting sage illustrate compounding: the sage asked for 1 grain of rice on the first chessboard square, doubling on each subsequent square.
• The grains grew rapidly: 128 on the 8th square, 32,768 by the 16th, and over 210 crore by the 32nd square.
• The king realised the power of exponential growth after paying a heavy price.
• This story shows how compounding works and how small amounts can grew into large sums.

Offer loans or credit

• Banks lend money to individuals, businesses, farmers, and others.
• These loans help people to start businesses, buy homes, continue their education, or deal with emergencies.
• By providing financial support to businesses banks encourage economic growth.
• Banks earn by charging higher interest on loans than what they pay on deposits.
• Examples: Shri Anand deposits ? 200 at 2% interest. The bank lends ₹ 200 to Shreya at 5% interest. Shreya repays ₹ 210 (₹ 200 principal + ₹ 10 interest). The bank pays ₹ 4 to Anand and earns ₹6.
• Banks keep a portion of deposits as reserve money and do not lend all deposits.
  How the Jan Dhan Yojana revolutionised banking in India
• Launched on 15 August 2014, the Jan Dhan Yojana aimed to provide every Indian access to a bank account.
• Before 2014, only 15 crore Indians had bank accounts, and most relied on cash.
• Jan Dhan Yojana allowed opening bank accounts with zero balance and no fees, especially for poor, rural people, and women.
• Since the launch, over 50 crore accounts have been opened, mostly by women.
• It helped farmers borrow money, workers receive wages directly, and students get scholarships directly into their accounts.
• Direct transfers eliminated intermediaries and ensured funds reached recipients on time.

Other Financial Institutions

• Indian post offices also offer financial services including savings schemes like NSC, Kisan Vikas Patra, and Sukanya Samriddhi accounts, even in remote areas.

• The Industrial Finance Corporation of India funds businesses in sectors such as power and textiles.
• NABARD supports rural development by providing loans for farming, village industries and infrastructure.

Reserve Bank of India – Banker to Banks

• The RBI, India’s central bank, supervises the banking system.
• Since 1949, it acts as the banker to banks under the Government of India.
• It manages accounts of banks, facilitates fund transfers, and provides loans to banks and the government.
• It sets key rules, including the benchmark interest rates and currency issuance.
• The Delhi Office features yaksha and yakshini statues, (demigods who guards treasure for Kubera, the God of Wealth) symbolising RBI as the guardian of the nation’s wealth.

Payments Modes And Systems

• Banks allow people to make payments easily through cheques, debit cards, internet banking, and UPI.

• Salaries, pensions, school fees, and bills can be paid without carrying cash.
• Most payment systems today are electronic and digital.

There are two main ways account holders can withdraw cash from their bank deposits.

1. Through withdrawal slip or cheque, give at the bank counter and collect cash.
2. Banks issue debit cards to customers when they open an account.

• Debit cards allow cash withdrawals from ATMs anytime.
• ATMs are self service machines available 24×7 at public places like railway stations, bus depots, markets, malls and airports.
• To withdraw cash, insert the debit card, enter the PIN, and select the amount.

How can money be transferred from one bank account to another?

Cheque

• A cheque is a paper instrument that instructs the bank to pay someone a certain sum of money.

• Larger payments can be made securely without carrying cash by using cheques.
• Money is transferred from the writer’s account to the recipient’s account when the recipient deposits the cheque at their bank.
• Using a cheque requires physically visiting the bank and takes time.

Debit cards and Point of Sale (POS) machines

• Debit cards can be used to make payments at shops such as grocery stores, clothing stores and chemists.

• They also let customers withdraw cash from ATMs.
• To pay, the card is swiped or inserted into a POS machine, and the amount and PIN are entered.
• The money is immediately deducted from the customer’s account (buyer) and is credited to the seller’s bank account.

Internet Banking (Net banking)

• A computer or laptop is used to transfer money via the bank’s website. There is no need to physically visit the bank.
• Enables account holders to view their balances and track transaction history.

Mobile payments

• Use BHIM or other UPI-based apps (PhonePe, Google Pay, Paytm, etc) on mobile phones to make digital payments.
• Send money by scanning a QR code or using the recipient’s mobile number.
• Users can check their transaction history any time on their mobile or on their laptop/ computer.

Unified Payments Interface (UPI): India’s gift to the world of payment systems

• Before 2016, transfering money required cheques or visiting banks, which was slow and inconvenient.
• NPCI (National Payments Corporation of India) launched UPI in 2016, enabling fast and secure digital payments.
• During COVID-19, UPI became widely used for contactless transactions.
• Its user-friendly design in multiple languages makes it accessible to everyone.
• India’s UPI is going global, adopted by countries like Nepal, UAE, France and Sri Lanka. Its instant, secure system is India’s gift to the world.

Stock Market

• The stock market is a huge internet marketplace where people purchase and sell company shares rather than physical goods.

• A share is a small ownership stake in a business. A business sells shares to the general public when it needs funding to expand, similar to giving friends part-ownership when borrowing money for any business.
• You become a shareholder of a firm if you purchase even one share of it. Your ownership stake increases with the number of shares you hold.
• A firm has multiple shares. Stock is a collection of shares.
• People invest in shares hoping their value will rise; companies sell shares to raise money for expansion and operations.
• Shares are traded through an authorised broker who is a member of a stock exchange.
• The Bombay Stock Exchange (BSE) is the oldest stock exchange in Asia which started its operations in 1875.
• Earlier, shares were traded using paper tickets, today all transactions are digital.
• When many share prices rise together, it is a stock market boom; when they fall together, it is a crash.
• Trading shares can lead to profit or loss because prices change constantly.
• Share prices rise when a company performs well and fall when it faces problems like strikes or losses.
• Prices also change due to external factors such as economic shocks, wars, political issues or new tax rules.

Financial Frauds and how to Prevent them

• Digital payments are helpful, but people need to stay cautious about scams.
• Criminals may send fake calls or messages to obtain OTPs, bank details, or make users install unsafe apps.
• This can let them access the device, steal information, and take money from accounts.
• If any fraud happens, immediately report it on 1930 or through the Cybercrime Reporting Portal.

→ ATM (Automated Teller Machine): An ATM is a machine that allows people to withdraw cash anytime using a debit card.

→ Bank: A bank is a financial institution that accepts deposits, gives loans, and helps people make payments safely.

→ Benchmark Interest Rate: It is the standard base rate fixed by the RBI that banks use to decide their own interest rates.

→ Compounding: Compounding is the process in which interest is added to the original amount so that interest is earned on the previous interest as well.

→ Credit: Credit means an entry that shows money coming into a bank account, usually when a person receives or deposits money.

→ Current Account: A current account is a bank account mainly used by business people who need to make frequent transactions and have access to an overdraft facility.

→ Cyber Fraud: Cyber fraud refers to online cheating done to steal money or personal information.

→ Debit: Debit means an entry that shows money going out of a bank account, usually when a person spends or withdraws money.

→ Debit Card: A debit card is a card issued by a bank that allows people to withdraw money and make digital payments.

→ Deposit: A deposit is the money that people keep in their bank accounts to save or earn interest.

→ Economic Shocks: Economic shocks are sudden events that disturb the normal working of the economy, such as unexpected price rise, global events, or natural disasters.

→ Fixed Deposit: A fixed deposit is money kept in the bank for a fixed time period ( from a few months to several years) to earn higher rate of interest.

→ Interest: Interest [in (%) percentage] is the extra amount of money that banks pay on deposits or charge on loans.

→ Investment: Investment is the use of money to buy assets or start activities with the aim of earning income or making a profit in the future.

→ Loan: A loan is the money borrowed from a bank that must be repaid with interest.

→ OTP (One-Time Password): An OTP is a temporary password used to confirm digital transactions.

→ Payment System: A payment system is a method through which money is transferred from one person to another, using cash, cheques, credit cards, debit cards, UPI, or other banking services.

→ PIN (Personal Identification Number): A PIN is a secret (normally 4 or 6 digits) number used to keep ATM and card transactions safe.

→ POS Machine: A POS (Point of Sale) machine is used in shops to swipe debit cards and make payments.

→ Quarterly: Quarterly refers to something that happens once every three months, or four times in a year.

→ RBI (Reserve Bank of India): The Reserve Bank of India is the central bank of the country that controls and regulates all other banks of the country.

→ Savings Account: A savings account is a bank account used to save money and earn interest.

→ Share: A share is a small unit of ownership in a company.

→ Stock Market: The stock market is a place where people buy and sell shares of companies.

→ Tax Rules: Tax rules are the set of laws made by the government, that guide how taxes are charged, collected, and paid by individuals and businesses.

→ UPI (Unified Payments Interface): UPI is a digital payment system that allows people to transfer money instantly using a mobile phone.

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