Managerial Economics and Financial Accounting

Chapter 1
Introduction

Definition of Managerial Economics 

Managerial economics is defined as the branch of economics which deals with the application of various

concepts, theories, and methodologies of economics to solve practical problems in business

management. It is also reckoned as the amalgamation of economic theories and business practices to ease the

process of decision making. Managerial economics is also said to cover the gap between the problems of logic

and problems of policy.  

Managerial economics is used to find a rational solution to problems faced by firms. These problems include

issues around demand, cost, production, marketing, and it is used also for future planning. The best thing

about managerial economics is that it has a logical solution to almost every problem that may arise during

business management and that too by sticking to the microeconomic policies of the firm.  

When we talk of managerial economics as a subject, it is a branch of management studies that

emphasizes solving business problems using theories of micro and macroeconomics. Spencer and Siegel

man have defined the subject as “the integration of economic theory with business practice to facilitate

decision making and planning by management.” The study of managerial economics helps the students to

enhance their analytical skills, developing a mindset that enables them to find rational solutions.

Nature of Managerial Economics  

We know about managerial economics like what it is and how different people define it. Managerial

Economics is an essential scholastic field. It can be termed as a science in the sense that it fulfills the criteria

of being a science.  

 We all know science as a systematic body of knowledge and it is based on methodological

observations. Similarly, Managerial Economics is also a science of making decisions and finding

alternatives, keeping the scarce of resources in mind. 

 In science, we arrive at any conclusion after continuous experimentation. Similarly, in managerial

economics policies are formed after constant testing and trailing. 

 In science, principles are universally acceptable and in managerial economics, policies are universally

applicable at least partially if not fully. 

 Types of Managerial Economics 
Everyone has their perceiving ability, so the same goes with managerial economics. All managers perceive

the concept of managerial economics differently. For some, customers’ satisfaction can be the priority while

some may focus on efficient production. This leads us to different types of managerial economics. So, let us

explore the different approaches to managerial economics.  

Liberal Managerialism 

Market is a free and democratic place in terms of decision making. Customers get a lot many options to

choose from. So, companies have to modify their policies according to consumers’ demands and market

trends. If not done so, it may result in business failures. This is what we call liberal managerialism.   

Normative Managerialism 

The normative view of managerial economics means that the decisions taken by the administration would be

normal, based on real-life experiences and practices. The decisions reflect a practical approach regarding

product design, forecasting, marketing, supply and demand analysis, recruitments, and everything else that is

concerned with the growth of a business.

Radical Managerialism 

Radical managerialism means to come up with revolutionary solutions. Sometimes, when the conventional

approach to a problem doesn’t work, radical managerialism may have the solution. However, it requires the

manager to possess some extraordinary skills and thinking to look beyond. In radical managerialism,

consumer needs and satisfaction are prioritized over profit maximization. 

So, these were the three different types of managerial economics. These are decided based on the different

approaches by managers.
 Principles of Managerial Economics
The great macroeconomist N. Gregory Mankiw has given ten principles to explain the significance of

managerial economics in business operations which can be further classified into three categories. 

Principles of Managerial Economics

 Principles of Management – Fayol’s 14 Principles
 Division of Work – This principle of management is based on the theory that if workers are given a
specialized task to do, they will become skillful and more efficient in it than if they had a broader
range of tasks. Therefore, a process where everyone has a specialized role will be an efficient one.
 Authority – This principle looks at the concept of managerial authority. It looks at how authority is
necessary in order to ensure that managerial commands are carried out. If managers did not have
authority then they would lack the ability to get work carried out. Managers should use their authority
responsibly and ethically.
 Discipline – This principle relates to the fact that discipline is needed within an organization for it to
run effectively. Organizational rules, philosophies, and structures need to be met. In order to have
disciplined workers, managers must build a culture of mutual respect and motivation.
 Unity of command – There should be a clear chain of command in place within an organization. An
employee should know exactly whose instructions to follow.
 Unity of direction – Work should be organized in a way that means employees are working in
harmony toward a shared objective or goal using a shared method or procedure.
 Subordination individual interests to the collective interests – The interests of the organization as a
whole should take precedence over the interests of any individual employee or group of employees.
This encourages a team spirit and collective mentality of all for one and one for all.
 Remuneration – In order to motivate and be fair to employees, they should be paid a reasonable rate
for the work they carry out. An organization that underpays will struggle to attract quality workers
who are motivated.
 Centralization – This principle relates to whether decisions should be made centrally, as in from the
top down, or in a more democratic way, from the bottom up. Different decision making processes are
appropriate for different types of decisions.
 Scalar chain – This relates to the principle of a clear chain of communication existing between
employees and superiors. The chain should be respected, unless speedy communication is vital, in
which case the chain may be bypassed if all parties consent.
 Order – This relates to the proper use of resources and their effective deployment in a structured
fashion.
 Equity – Managers should behave ethically towards those they manage. Almost every organization in
the modern world will have a written set of policies and procedures which will outline exactly what is
expected from staff at all levels.
 Stability of tenure of personnel – It is seen as desirable within an organization to have a low staff
turnover rate. This is due to the benefits that come with having experienced staff and the time and
expense needed to train new ones. There should be a clear and efficient method of filling any staff
vacancies that arise.
 Initiative – Employees that have an input as to how to best do their job are likely to feel more
motivated and respected. Many organizations place a great deal of emphasis on listening to the
concerns of staff.
 Morale – Keeping a high level of morale and team spirit is an essential part of having the most
productive organization possible. Happy and motivated employees are far more likely to be
productive and less absent.

The Functions of Management

While managers often view their work as task or supervisory in orientation, this view is an illusion. 

At the most fundamental level, management is a discipline that consists of a set of five general functions:
planning, organizing, staffing, leading and controlling. These five functions are part of a body of practices and
theories on how to be a successful manager.
 Understanding the functions will help managers focus efforts on activities that gain results. Summarizing the
five functions of great management (ICPM Management Content):

1. Planning: When you think of planning in a management role, think about it as the process of choosing
appropriate goals and actions to pursue and then determining what strategies to use, what actions to take,
and deciding what resources are needed to achieve the goals.
2. Organizing: This process of establishing worker relationships allows workers to work together to achieve
their organizational goals.
3. Leading: This function involves articulating a vision, energizing employees, inspiring and motivating
people using vision, influence, persuasion, and effective communication skills.
4. Staffing: Recruiting and selecting employees for positions within the company (within teams and
departments).
5. Controlling: Evaluate how well you are achieving your goals, improving performance, taking actions.
Put processes in place to help you establish standards, so you can measure, compare, and make decisions.

Production Management
Definition of Production Management: "Production management deals with decision-making related to
production processes so that the resulting goods or service is produced according to specification, in the
amount and by the schedule demanded and at minimum cost."

Importance of Production Management

The importance of production management to the business firm:

1. Accomplishment of firm's objectives: Production management helps the business firm to achieve all its
objectives. It produces products, which satisfy the customers' needs and wants. So, the firm will increase its
sales. This will help it to achieve its objectives.
2. Reputation, Goodwill and Image: Production management helps the firm to satisfy its customers. This
increases the firm’s reputation, goodwill and image. A good image helps the firm to expand and grow.
3. Helps to introduce new products: Production management helps to introduce new products in the market.
It conducts Research and development (R&D). This helps the firm to develop newer and better quality
products. These products are successful in the market because they give full satisfaction to the customers.
4. Supports other functional areas: Production management supports other functional areas in an
organization, such as marketing, finance, and personnel. The marketing department will find it easier to sell
good-quality products, and the finance department will get more funds due to increase in sales. It will also
get more loans and share capital for expansion and modernization. The personnel department will be able
to manage the human resources effectively due to the better performance of the production department.
5. Helps to face competition: Production management helps the firm to face competition in the market. This
is because production management produces products of right quantity, right quality, right price and at the
right time. These products are delivered to the customers as per their requirements.
6. Optimum utilization of resources: Production management facilitates optimum utilization of resources
such as manpower, machines, etc. So, the firm can meet its capacity utilization objective. This will bring
higher returns to the organization.
7. Minimizes cost of production: Production management helps to minimize the cost of production. It tries
to maximize the output and minimize the inputs. This helps the firm to achieve its cost reduction and
efficiency objective.
8. Expansion of the firm: The Production management helps the firm to expand and grow. This is because it
tries to improve quality and reduce costs. This helps the firm to earn higher profits. These profits help the
firm to expand and grow.
Objectives of Production Management:
The four objectives of the production management is ‘to produce goods services of right quality and
quantity at the right time and right manufacturing cost.’
1. Right Quality:
The quality of the product is established based on the customer needs in the market. The right quality is not
necessarily the best quality of the product. It is determined by the cost of the product and the technical
characteristics as suited to the specific requirements of the customers in the market environment.
2. Right Quantity:
The manufacturing organization should produce the products in the right number. If they are produced more
than demand the capital will block up in the form of inventory and if the quantity is produced in short of
demand, leads to a shortage of products.
3. Right Time:
Timeliness of delivery of the product to the consumer or wholesaler is one of the critical parameters to judge
the effectiveness of the production department. So, the production department has to make the optimal
utilization of input resources to achieve its desired objectives.
4. Right Manufacturing Cost:
Manufacturing costs are incurred before the product is manufactured and released into the market. Hence, all
attempts should be made to the duce the products at a pre-established cost, to reduce the variation between the
actual and the standard (pre-established) cost.
Features of Production management:
Some of the key features of production management are as follows.
1. Production management deals with processes. It is not possible for a single person to perform
the function of production management. Production management includes some staff such as
supervisors, materials managers and store managers or anyone who manage staff, equipment, or
materials.
2. The management term in broad interpretation includes the design of the system and performance
of all the activities mandatory to operate the system that encompasses the directions to staff and
acquiring material and equipment.
3. The term highlights the fact that to manage the production of the organization’s final products;
there are many subsystems as parts of the production system. For example, the cost accounting
department in a manufacturing company is part of the production system.
4. The goal of production management is to minimize costs, for most of the organizations. It also
helps to improve the efficiency and productivity of the production system.

Human Resource Management

Human Resource Management is the process of recruiting, selecting, inducting employees, providing
orientation, imparting training and development, appraising the performance of employees, deciding
compensation and providing benefits, motivating employees, maintaining proper relations with employees
and their trade unions, ensuring employees safety, welfare and healthy measures in compliance with labour
laws of the land. 

Why do we call it as Human Resource Management?

Human: refers to the skilled workforce in an organization.

Resource: refers to limited availability or scarce.
Management: refers how to optimize and make best use of such limited or scarce resource so as to meet the
organization goals and objectives.

Project Management Information Systems

Functions of Project Management Information Systems

A Project Management Information System (PMIS) is one or more software tools used for a project’s
information storage and distribution.

There are many types of PMIS, and equally diverse ways of applying these types of systems for optimal
benefit to the organization.

The components of a project management information system are:

 Scheduling
 Estimating
 Resources
 Project documents and data
 Portals and dashboards
 Collaborative work management tools
 Social media
 Project control

Scheduling

Because schedules are such a core component of project management as a whole, almost all project
management information systems contains scheduling tools.  The project schedule is communicated
to stakeholders and forms the baseline for project control, that is, the project is continuously measured on the
basis of its adherence to the schedule.

Project estimating involves assigning a price to each of the project tasks.  Each task is then rolled up into an
overall project estimate.  In a perfect world, the actual project cost will always fall within the estimate, but we
know that is only an ideal to be strived for.

A good project management information system will track the estimated cost of each task as well as the
justification for the estimate.  For example a parametric estimate based on a unit rate taken from an industry
source, or an analogous estimate from another project.  The estimator can enter the information so that it can
be referenced later.

Even better is an information system that tracks all tasks throughout all of the organization’s projects, so that
it is very easy to call up and compare past actual data with new estimates.  Many project-based organizations
or programs (series of many projects) track data this way:

Resources

Almost all tasks require resources for their completion.  The simplest tasks often have only a project team
member for a specified period of time, but that is still a resource that needs to be available and managed in
order to complete the task.

Hence, a good project management information system will allow the assignment of resources to tasks.  These
resources should also come with meta data such as their cost per unit, efficiency rate, or maintenance
requirements.

This allows for ease of project tracking when the project management team must acquire the resources to
ensure the task completes on its expected end date.  It also ensures the resource requirements are adequately
planned into the project, for example maintenance requirements or efficiency rate.

More sophisticated project management information systems can utilize components such as resource
calendars, which specify when a resource is available, or resource breakdown structures, that specify a
hierarchical matrix of resources which can be chosen from and coordinated with other projects.

Project Documents and Data

Virtually all projects produce documents as part of their scope, for example design reports or product
documentation.  Most projects also import documents and data for use in project work, for example
databases.  Still other projects have a reference library data set that is consulted by the project.  For these
reasons, project document control has become a specialty in and of itself.

Every document tracked by the project is cataloged and the requirements are defined.  Variables used to track
documents include:

 Owner
  Storage location
 Format
 Scheduled dates:  Creation, approval, and submission
 Actual dates
 Review / Approval team members
 Status
Large projects like engineering or industrial projects utilize comprehensive project document control software
systems run by dedicated document control staff.  However, for most small and medium sized projects, a
smaller document control system will suffice consisting of a web based portal that allows the upload and
tracking of project documents.

Portals and Dashboards

There are many web based project management software tools that provide a centralized dashboard for the
project.  Their features includes many of the other categories, like scheduling, documents, and project team
messaging.  This technology is becoming relatively advanced and provides strong feature sets without major
investments in software training.

In addition, project stakeholders often require information dissemination tools such as web sites and project
portals.  For example, governmental regulatory agencies often have department-specific document upload and
project information sites, which are then communicated to the stakeholder group on the other side who’s
needs are being balanced with the project.

Collaborative Work Management Tools

Nowadays many projects utilize internal communication tools like project chat rooms, messaging apps, and so
forth.  This technology allows project team members to quickly and confidentially record critical
project communications with other members of the team.

Often these software tools are located within larger web based project management tools, but they can also be
standalone apps.

Social Media

Many project also use social media to communicate with stakeholders.  This technology is very easy to set up
and use, and most stakeholders already know how to navigate the software.

For example, project Facebook pages or twitter accounts can be used to rapidly communicate project
information to stakeholders, but they are dependent on the stakeholder checking for new messages.

Hence, critical messages should probably be communicated via a “push” method rather than social media,
which is a “pull” method.
Project Control

Project control refers to the tasks undertaken by the project management team to measure the project’s
progress and ensure it conforms to the project management plan.  Usually project control is dominated by the
two uber-important factors of schedule and budget.  But there are other, smaller aspects.

Project control involves the following components:

 Schedule:  Ensure the project is on track to complete on time.

 Cost:  Ensure the project is on track to complete within its budget.
 Scope:  Ensure the scope has not changed, and that additional, unauthorized work is not being
performed.
 Quality:  Ensure the quality of the products being produced is according to the specifications within the
plan.
 Resources:  Ensure the resources are still available and they are not overextended.
 Procurement:  Ensure the required subconsultants, suppliers, and materials are still available and are
performing their work as planned.
 Risks:  Ensure the risks to project success are still being adequately mitigated.
 Communications:  Ensure the stakeholder communications are conforming to the communications plan.
An effective project management information system provides a place for the project manager to track these
items, thereby ensuring a project that sticks like glue to its project management plan.

Because a project is defined as temporary and unique, the first two (schedule and cost) are virtually always a
central consideration in project success.  They are tracked using a system called earned value management. 
In this system, the budget and schedule status are calculated based on the percent complete of each task.  This
status is calculated and reported in the following four variables:

1. Schedule Variance (SV):  The amount that the project is ahead or behind schedule expressed as a
project budget, for example, SV = $1,000 means that the project is ahead of schedule.
2. Cost Variance (CV):  The amount that the project is under or over budget.  For example, CV = $1,500
means that the project under budget by this amount.
3. Schedule Performance Index (SPI):  The schedule efficiency, or the amount that the project is ahead
or behind schedule as a percentage of the overall project size.  For example, SPI = 1.1 means the project
is 10% ahead of schedule.
4. Cost Performance Index (CPI):  The cost efficiency, or the amount that the project is under or over
budget as a percentage of the overall project size.  For example, CPI = 0.8 means the project is 20%
over budget.
There are several other variables that are used to extrapolate the current project performance to determine the
projection of final project schedule and budget, for example the Estimate to Complete  (ETC), Estimate at
Completion (EAC), Variance at Completion (VAC) and the To Complete Performance Index (TCPI).

It is possible to track project progress without using earned value metrics.  But a project management
information system that follows well established project management industry standards will feature the
calculation of these values.  And the project manager using them will need to know what they mean
to present them to upper management or stakeholders.

Marketing Management

Major Functions of Marketing Management

We need to understand the major functions of marketing management in order to understand and groom our
organization. The following are some of the major functions of marketing management −

 Selling
 Buying and Assembling
 Transportation
 Storage
 Standardization and Grading
 Financing
 Risk Taking
 Market Information
The marketing process performs certain activities as the products and services move from the producer to
consumer. All these activities or jobs are not performed by every company.

Nonetheless, it is recommended that they be carried out by any company that wants its marketing systems to
function successfully.
Selling
Selling is the crux of marketing. It involves convincing the prospective buyers to actually complete the
purchase of an article. It includes transfer of ownership of products to the buyer.
Selling plays a very vital part in realizing the ultimate aim of earning profit. Selling is groomed by means of
personal selling, advertising, publicity and sales promotion. Effectiveness and efficiency in selling
determines the volume of the firm’s profits and profitability.
Buying and Assembling
It deals with what to buy, of what quality, how much from whom, when and at what price. People in
business purchase to increase sales or to decrease costs. Purchasing agents are much tempted by quality,
service and price. The products that the retailers buy for resale are selected as per the requirements and
preferences of their customers.
Assembling means buying necessary component parts and to fit them together to make a product. ‘Assembly
line’ marks a production line made up of purely assembly functions. The assembly operation includes the
arrival of individual component parts at the work place and issuing of these parts for assembling.

Transportation
Transportation is the physical means through which products are moved from the places where they are
produced to those places where they are needed for consumption. It creates locational utility.
Transportation is very important from the procurement of raw material to the delivery of finished products to
the customer’s places. Transportation depends mainly on railroads, trucks, waterways, pipelines and airways.
Storage
It includes holding of products in proper, i.e., usable or saleable, condition from the time they are produced
until they are required by customers in case of finished products or by the production department in case of
raw materials and stores.
Standardization and Grading
Standardization means setting up of certain standards or specifications for products based on the intrinsic
physical qualities of any item. This may include quantity like weight and size or quality like color, shape,
appearance, material, taste, sweetness etc. A standard gives rise to uniformity of products.
Grading means classification of standardized items into certain well defined classes or groups. It includes the
division of products into classes made of units possessing similar features of size and quality.
Grading is very essential for raw materials; agricultural products like fruits and cereals; mining products like
coal, iron and manganese and forest products like timber.
Financing
Financing involves the application of the capital to meet the financial requirements of agencies dealing with
various activities of marketing. The services to ensure the credit and money needed and the costs of getting
merchandise into the hands of the final user are mostly referred to as the finance function in marketing.
Financing is required for the working capital and fixed capital, which may be secured from three sources —
owned capital, bank loans and advance & trade credit. In other words, different kinds of finances are short-
term, medium-term, and long-term finance.
Risk Taking
Risk means loss due to some unforeseen situations. Risk bearing in marketing means the financial risk
invested in the ownership of goods held for an anticipated demand, including the possible losses because of
fall in prices and the losses from spoilage, depreciation, obsolescence, fire and floods or any other loss that
may occur with the passage of time.
They may also be due to decay, deterioration and accidents or due to fluctuation in the prices induced by
changes in supply and demand. The different risks are usually termed as place risk, time risk, physical risk,
etc.
Market Information
The importance of this facilitating function of marketing has been recently marked. The only sound
foundation on which marketing decisions depend is timely and correct market information.
The importance of this facilitating function of marketing has been recently marked. The only sound
foundation on which marketing decisions depend is timely and correct market information.
Definition of Financial Accounting

Financial Accounting is an accounting system which is concerned with the preparation of financial statement
for the outside parties like creditors, shareholders, investors, suppliers, lenders, customers, etc. It is the purest
form of accounting in which proper record keeping and reporting of financial data are done, to provide
relevant and material information to its users.

Financial Accounting is based on various assumptions, principles and convention like going concern,
materiality, matching, realisation, conservatism, consistency, accrual, historical cost, etc. The financial
statement consists of a Balance Sheet, Income Statement and Cash flow statement which are prepared as per
the guidelines provided by the relevant statute.

Normally, the statements based on the financial accounting are prepared for one accounting year, to enable
the user to make comparisons regarding the financial position, profitability and performance of the company
in a specific period. Not only external parties but internal management also gets information for forecasting,
planning, and decision making.

Definition of Management Accounting

Management Accounting, also known as Managerial Accounting is the accounting for managers which helps
the management of the organisation to formulate policies and forecasting, planning and controlling the day to
day business operations of the organisation. Both the quantitative and qualitative information are captured and
analysed by the management accounting.

The functional area of management accounting is not limited to providing a financial or cost information
only. Instead, it extracts the relevant and material information from financial and cost accounting to assist the
management in budgeting, setting goals, decision making, etc. The accounting can be done as per the
requirement of the management, i.e. weekly, monthly, quarterly, etc. and there is no format set on the basis of
which it is to be reported.

Comparison Chart
BASIS FOR
COMPARISO FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
N

Meaning Financial Accounting is an accounting The accounting system which provides

system that focuses on the preparation of relevant information to the managers to
financial statement of an organization to make policies, plans and strategies for
provide the financial information to the running the business effectively is known
interested parties. as Management Accounting.

Is is Yes No
compulsory?

Information Monetary information only. Monetary and non-monetary information

Objective To provide financial information to To assist the management in planning and

outsiders. decision making process by providing
detailed information on various matters.
 BASIS FOR
COMPARISO FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
N

Format Specified Not specified

Time Frame Financial Statements are prepared at the The reports are prepared as per the need
end of the accounting period which is and requirements of the organization.
usually one year.

User Internal and external parties Only internal management.

Reports Summarized Reports about the financial Complete and Detailed reports regarding
position of the organization various information.

Publishing and Required to be published and audited by Neither published nor audited by statutory
auditing statutory auditors auditors.

Power of 7Ms in business:

1. Man
2. Material
3. Machine
4. Money
5. Method
6. Measurement
7. Marketing
 Scope of Managerial Economics
Managerial economics is widely applied in organizations to deal with different business issues. Both the
micro and macroeconomics equally impact the business and its functioning.

Following points illustrate its scope:

Micro-Economics Applied to Operational Issues

To resolve the organization’s internal issues arising in business operations, the various theories or principles
of microeconomics applied are as follows:

 Theory of Demand: The demand theory emphasizes on the consumer’s behavior towards a product
or service. It takes into consideration the needs, wants, preferences and requirement of the consumers to
enhance the production process.
 Theory of Production and Production Decisions: This theory is majorly concerned with the volume
of production, process, capital and labor required, cost involved, etc. It aims at maximizing the output
to meet the customer’s demand.
 Pricing Theory and Analysis of Market Structure: It focuses on the price determination of a product
keeping in mind the competitors, market conditions, cost of production, maximizing sales volume, etc.
 Profit Analysis and Management: The organizations work for a profit. Therefore they always aim at
profit maximization. It depends upon the market demand, cost of input, competition level, etc.
 Theory of Capital and Investment Decisions: Capital is the most critical factor of business. This
theory prevails the proper allocation of the organization’s capital and making investments in profitable
projects or venture to improve organizational efficiency.

Managerial Economics has a more narrow scope. It solves a firm’s problem using microeconomics. In the
situation of scarce resources, managerial economics ensures that managers make effective and efficient
decisions that are equally beneficial to customers, suppliers, and the organization. The fact of scarcity of
resources gives rise to three fundamental questions- 

What to produce? How to produce? For whom to produce?

 Managerial Economics is not only applicable to profit-making business organizations, but also to non- profit
organizations such as hospitals, schools, government agencies, etc.
 Inflation
Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure,
such as the overall increase in prices or the increase in the cost of living in a country.
The three types of Inflation are Demand-Pull, Cost-Push and Built-in inflation.
Demand-pull Inflation: It occurs when the demand for goods or services is higher when compared to the
production capacity. The difference between demand and supply (shortage) result in price appreciation.
Cost-push Inflation: It occurs when the cost of production increases. Increase in prices of the inputs (labour,
raw materials, etc.) increases the price of the product.
Built-in Inflation: Expectation of future inflations results in Built-in Inflation. A rise in prices results in higher
wages to afford the increased cost of living. Therefore, high wages result in increased cost of production,
which in turn has an impact on product pricing. The circle hence continues.
What are the main causes of inflation?
Monetary Policy: It determines the supply of currency in the market. Excess supply of money leads to
inflation. Hence decreasing the value of the currency.
Fiscal Policy: It monitors the borrowing and spending of the economy. Higher borrowings (debt), result in
increased taxes and additional currency printing to repay the debt.
Demand-pull Inflation: Increases in prices due to the gap between the demand (higher) and supply (lower).
Cost-push Inflation: Higher prices of goods and services due to increased cost of production.
Exchange Rates: Exposure to foreign markets are based on the dollar value. Fluctuations in the exchange rate
have an impact on the rate of inflation.
Classification of Bank

Banks are classified into scheduled and non-scheduled banks. Scheduled banks can further be classified into
commercial banks and cooperative banks. Commercial Banks can be further classified into public sector
banks, private sector banks, foreign banks and Regional Rural Banks (RRB). On the other hand, cooperative
banks are classified into urban and rural. Apart from these, a fairly new addition to the structure is payments
bank.

Schedules banks
Schedules banks are covered under the 2nd Schedule of the Reserve Bank of India Act, 1934. A bank that has
a paid-up capital of Rs. 5 Lakh and above qualifies for the schedule bank category. These banks are eligible to
take loans from RBI at bank rate.
Commercial Banks
Commercial Banks are regulated under the Banking Regulation Act, 1949 and their business model is
designed to make profit. Their primary function is to accept deposits and grant loans to the general public,
corporates and government. Commercial banks can be divided into-
These are the nationalised banks and account for more than 75 per cent of the total banking business in the
country. Majority of stakes in these banks are held by the government. In terms of volume, SBI is the largest
public sector bank in India and after its merger with its 5 associate banks (as on 1 st April 2017) it has got a
position among the top 50 banks of the world.

There are a total of 21 nationalized banks in the country namely below:

 State Bank of India Bank of India Allahabad Bank

Bank of Maharashtra Canara Bank Indian Overseas Bank

IDBI Bank Oriental Bank of Commerce Central Bank of India

Corporation Bank Andhra Bank UCO Bank

Bank of Baroda Union Bank of India United Bank of India

Vijaya Bank Dena Bank Indian Bank

Punjab & Sind Bank Punjab National Bank Syndicate Bank

Private sector Bank

These include banks in which major stake or equity is held by private shareholders. All the banking rules and
regulations laid down by the RBI will be applicable on private sector banks as well. Given below is the list of
private-sector banks in India-

HDFC Bank ICICI Bank Axis Bank

 YES Bank IndusInd Bank Kotak Mahindra Bank

DCB Bank Bandhan Bank IDFC Bank

City Union Bank Tamilnad Mercantile Bank Nainital Bank

Catholic Syrian Bank Federal Bank Jammu and Kashmir Bank

Karnataka Bank Dhanlaxmi Bank South Indian Bank

Lakshmi Vilas Bank RBL Bank Karur Vysya Bank

Foreign Banks

A foreign bank is one that has its headquarters in a foreign country but operates in India as a private entity.
These banks are under the obligation to follow the regulations of its home country as well as the country in
which they are operating. Citi Bank, Standard Chartered Bank and HSBC are some leading foreign banks in
India.

Regional Rural Banks

These are also scheduled commercial banks but they are established with the main objective of providing
credit to weaker sections of the society like agricultural labourers, marginal farmers and small enterprises.
They usually operate at regional levels in different states of India and may have branches in selected urban
areas as well. Other important functions carried out by RRBs include-

 Providing banking and financial services to rural and semi-urban areas

 Government operations like disbursement of wages of MGNREGA workers, distribution of pensions,
etc.
 Para-Banking facilities like debit cards, credit cards and locker facilities
Small Finance Banks

This is a niche banking segment in the country and is aimed to provide financial inclusion to sections of the
society that are not served by other banks. The main customers of small finance banks include micro
industries, small and marginal farmers, unorganized sector entities and small business units. These are
licensed under Section 22 of the Banking Regulation Act, 1949 and are governed by the provisions of RBI
Act, 1934 and FEMA.

Au Small Finance Bank Ltd. Capital Small Finance Bank Ltd.

Fincare Small Finance Bank Ltd. Equitas Small Finance Bank Ltd.

ESAF Small Finance Bank Ltd. Suryoday Small Finance Bank Ltd.

Ujjivan Small Finance Bank Ltd. Utkarsh Small Finance Bank Ltd.

North East Small Finance Bank Ltd. Jana Small Finance Bank Ltd.

Co-operative Banks

Co-operative banks are registered under the Cooperative Societies Act, 1912 and they are run by an elected
managing committee. These work on no-profit no-loss basis and mainly serve entrepreneurs, small
businesses, industries and self-employment in urban areas. In rural areas, they mainly finance agriculture-
based activities like farming, livestock and hatcheries.

Payments Bank

This is a relatively new model of bank in the Indian Banking industry. It was conceptualised by RBI and is
allowed to accept a restricted deposit. The amount is currently limited to Rs. 1 Lakh per customer. They also
offer services like ATM cards, debit cards, net-banking and mobile-banking.