COTRACT OF SALE

COTRACT OF SALE

SALE BY NON-OWNER

1. Sale by one of joint owners

If one of the several joint owners, who has the sole possession of the goods by permission of the co-owners, sells the goods, a buyer will get a good title to the goods provided the buyer busy them in good faith and without notice that the seller’s title was defective at the time of contract.

Example

A, B and C are three brothers. They own a cow in common. B and C entrust the work of looking after the cow to A and leave the cow in A’s possession. A sells the cow to D. D gets a good title.

2. Sale by a Person in Possession Under Voidable Contract

When a person has obtained possession of the goods under a voidable contract and he sells those goods before the contract has been cancelled, the buyer of such goods acquire a good title to them provided the buyer acts in good faith and without notice of the seller’s defect of title.

3. Sale by Seller in Possession After Sale

Where a person has sold goods but continues in possession of them or of the documents of title thereof, he may sell them to a third person and if such person obtains delivery thereof in good faith and without notice of the previous sale, he gets a good title to them, although the property in the goods has passed to the first buyer.

Example

A sell goods to B but leaves such goods with A. A fraudulently sells the goods to C who buys them in goods faith and without notice of sale of the goods to B. C would get good title to the goods.

4. Sale by Buyer in Possession After Agreement to Buy

If the buyer obtains possession of the goods before the property in such gods has passed to him with the consent of the seller, he may sell, pledge or otherwise dispose of the goods to a third person and if such person obtains delivery of the goods in good faith and without notice of any lien or other right of the original seller in respect of the goods, he will get a good title to them.

5. Sale by an Unpaid seller

Where an unpaid seller who as a right of lien or stoppage in transit resells the goods of which ownership gas passed to the buyer, the subsequent buyer gets a good title to the goods as against original buyer.

Example

A sells a sofa set to B for Rs. 10 thousand. B pays Rs. 4 thousand as advance and promises to pay the balance on next day at the time of taking the delivery of sofa. B does not pay the balance for several days. A retains the sofa and sells it to C. C gets a good title.

8. Sale by Finder of Lost Goods

A finder of the lost goods can also sell the goods under some circumstances and the buyer will get a good title

9. Sale by Pledgee

A pledgee can also sell the goods under some circumstances. The buyer gets a goods title.

Example

X pledgee his tractor to Y and borrows Rs. 5 Lac. X does not pay the loan Y sell the tractor to Z. Z gets a good title.

10. Exceptions under other Acts

Under certain Acts a person although he is not the owner of the goods may sell the goods and pass a better title than he himself has. The following are some of such cases.

(a) In case insolvency of individuals and companies, the official receiver can convey a better title to the buyer.

(b) In case of negotiable instruments, the holder in due course gets a better title than that of transferor. In other words, a person who takes a negotiable instruments in good faith and for value becomes the true owner even if he takes it from a thief or finder.

Example

(a) A becomes insolvent. B, the official receiver of A sells some goods of A to X. X gets a good title to goods.

(b) A steals a bill of B. A endorses the same to X under the circumstances which make X, a holder in due course. X gets a good title.

PERFORMANCE OF CONTRACT OF SALE

Delivery of Goods

Delivery of goods means voluntary transfer of possession of goods from one person to another, it is a bilateral act. It requires two parties to the act. The essential elements of delivery are;

(a) A person has possession;

(b) He transfers that possession to another person;

(c) He does so voluntarily

Example

B steal goods from A, there is no delivery from A to B though possession is transferred .

Mode of Delivery

Delivery of goods may be made in any of the following ways:

1. Actual Delivery

Where the goods are physically handed over buy the seller or his agent to the buyer or his agent, the delivery is said to be actual. In this case the physical custody of the goods transfers from seller to the buyer.

Example

When A, the seller of a car hands over the car to B, the buyer, there is actual delivery of the goods.

2. Symbolic Delivery

In this case the goods are not physically handed over the buyer but means of obtaining possession of goods is delivered. It is made where goods are heavy and cannot be actually delivered to buyer.

3. Constructive delivery

It takes place when the person in possession of the goods of the seller acknowledges, in accordance with the seller’s order, which he holds the goods on behalf of the buyer and the buyer has assented to it.

Example

X sells to y 10 bags of cement lying in Z’s godown. X gives an order to Z to transfer the goods to Y. Z transfers the goods in his books to Y. This is a constructive delivery.

Rules Regarding Delivery of Goods

The rules regarding delivery of goods are as follow:

1. Duties of Seller and Buyer

It is the duty of the seller to deliver the goods to the buyer and it is the duty of the buyer to accept and pay for the goods according to the terms of the contract of sale.

2. Delivery and payment

Unless otherwise agreed, the seller should be ready to deliver the goods to the buyer in exchange for the price and the buyer should be ready to pay the price in exchange for possession of goods simultaneously, just like a cash sale over a counter.

Example

A agree to sell to B sugar for Rs. 20 thousand. A need not deliver the goods unless B is ready to pay the price on delivery and B need not pay for the goods unless A delivers them on payment.

3. Mode of Delivery

Delivery of goods sold may be made by any of the ways on which the parties agree. The delivery of goods may be either actual or symbolic or constructive. Therefore, a delivery to any one other than the buyer or his agent is not sufficient.

4. Effect of Part Delivery

When a delivery of part of the goods has been made with the intention of delivering the rest of goods also, the ownership in the whole od the goods is deemed to pass to the buyer as soon as some portion is delivered. But a delivery of part of the goods, with the intention of severing it from the whole does not operate as delivery of the remainder.

Example

S sold 5 bales of certain goods. B received 1 bale, paid for it and refused to accept 4. Held, it was a part delivery (Mitchell Reid Co. vs Balder Dass)

5. Buyer to Apply for Delivery

A part of any express contract, the seller is nor bound to deliver the goods to the buyer unless the buyer applies fir delivery. If the seller fails to deliver, he is guilty of breach of contract.

6. Place of Delivery

The goods must be delivered at a specified place, which is stated in a contract during business hours on a working day. But where no place is mentioned in the contract, the following rules will apply:

(a) In case of sale, the goods are to be delivered at the place at which they are at the time of the sale.

(b) In an agreement to sell, the goods are to be delivered at the place at which they are at the time of the agreement to sell.

(c) In the case of future goods, the are to be delivered at the place at which they are manufactured or produced.

Example

A contracts B to supply him bricks at 22 Mall Road. A is bound to supply at 22 Mall Road where parties made a contract.

7. Time of Delivery

The seller is bound to send the goods to buyer within a fixed time, if any. If there is no fixed time, the seller should send within a reasonable time. Moreover demand of delivery by the buyer or the delivery of the goods by the seller should be made at a reasonable time.

8. Goods in Possession of a Third Party

Where the goods at the tome of sale are in the possession of a third person, there is no delivery by the seller to the buyer unless and until such third person acknowledges to the buyer that he holds the goods on his behalf.

Example

A has his goods in B’s store. A sells goods to X and gives him a receipt to take from B. B agrees to give him. There is a delivery of goods to buyer.

9. Expenses of Delivery

Unless otherwise agreed, the expenses of putting the goods into deliverable state must be borne by the seller.

10. Wrong Delivery

A seller is responsible to deliver the goods to the buyer in accordance with the terms of the contract. In case of wrong delivery, the buyer can reject the goods Wrong delivery may be either short delivery, excess delivery or mixed delivery.

Example

A buys 40 bottles of Pepsi Cola from B. B sends 30 bottles A may reject the whole or accept 30 and ask for the rest.

11. Installment Deliveries

Unless otherwise agreed, the buyer is not bound to accept the delivery of goods in installments. If the parties so agree then only the delivery of the goods may be made by installments.

12. Delivery to Carrier

Where the seller is required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission the buyer, is deemed t be a delivery of the goods to the buyer.

Example

A sell TV to B. A hands over the TV to the carrier to be delivered to B. it means the delivery has been made to B.

13. Goods Delivered at a Distinct Place

Where the seller of goods agrees to deliver the goods at his own risk other than that where they are sold, the buyer shall take risk of any deterioration in good incident to the transit.

14. Examining the Goods by buyer

When the seller delivers the goods to the buyer he is bound to give a reasonable opportunity to the buyer to examine the goods for the purpose of ascertaining whether they are in accordance with the contract.

Example

A supplies bricks to B. A is bound to give son=me time to B to check whether the bricks are according to the contract.

15. Acceptance of Delivery by buyer

According to section 42, the buyer is deemed to have accepted the goods in either of the following circumstances:

(a) When he intimates to the seller that he has accepted the goods.

(b) When he does any act in relation to the goods, which is inconsistent with the ownership of the seller.

(c) When, after the lapse of a reasonable time, he retains the good without intimating the seller that he has rejected them.

Example

(a) A sell and delivers wheat to B. B informs A that he has accepted the goods.

(b) H bought wheat and then resold part of it, Afterwards H. decided top reject it on the ground that it was not according to the contract. It was held that he has lost his right of rejection.

(c) A buys a rice from B. On taking delivery A does not inform B. It is considered that A has accepted the goods after a reasonable time.

16. Buyer not Bound to Return Rejected Goods

Where goods are delivered to the buyer and he refuses to accept them, having the right to do so, he is not bound to return them to the seller. He should only inform to the seller about his rejection.

17. Liability in Case of Refusing to Take Delivery of Goods

When the seller is ready to deliver the goods and requests the buyer to take delivery. And the buyer does not take delivery of goods within reasonable time, the buyer is liable to the seller for any loss arising on account of refusing to take delivery.

Example

C sells and delivers a car to S. S refuses to take delivery. If C sells car to X and suffers a loss He is entitled to claim damages from S.

BAILMENT

BAILMENT

Definition

The word bailment is come out of a French word “bailor” which means to deliver. I denote a contract resulting from delivery of goods it involves exchange of goods from one person to another and not transfer of ownership. According to three sections 148 a bailment is the delivery of goods by one person to another for some purpose, upon the contract they shall when the purpose is accomplished, be returned or otherwise be disposed of according to the direction of the person delivering them.

Kinds of Bailment contracts

There are three types of bailment contracts, which are as under

i. According to benefit

ii. According to reward.

According to benefit; - According to benefit bailment can be classified into three categories

i. For the benefit of the bailor: - When the goods are delivered to any friend, relative or any neighbor without any compensation to be paid.

iii. For the benefit of the bailee: - When the goods are delivered to bailee for a specific purpose without any compensation than it is the benefit of the bailee.

iv. For ht benefit of bailee and beilor :- When the goods are delivered for the benefit of both the bailer and bailee than it is the contract in the benefit of bailor and bailee.

According to reward; - It has the following categories

i. Bailment without reward; - When the bailor and the bailee both are not entitle for any remuneration that it is called bailment without reward. For example, when a friend gives his book to other friends than it is the bailment without reward.

ii. Bailment for reward: - It its he bailment in which both bailor and the bailee has the right for remuneration is called bailment with reward. For example, when a person lend his car for Gs. 10,000/-.

Rights of bailee: - The duties of the bilor are the rights of the bailee

i. Right to claim damages: - In case of bailment without reward the bailee is entitled to know the defaults in the goods bailed to him of which the bailor is aware. A bailor haste right t claim compensation form the bailor for any loss or damages arising directly from such faults in the goods hailed.

ii. Rights to recover expenses; - the bailee can recover all the necessary expenses incurred by him due to any defect in the bailer’s title and lawful charges for providing services.

iii. Rights to compensation: - If the baialor has no right to bail the goods or to receive them back or to give directions regarding them and as a result the bailee suffers a loss, the bailee is entitled to receive such loss form the bailor (section 164).

iv. Right to stop delivery: - if a person other than the bailor claimed goods bailed than the bailee has the right to apply to the court for the stoppage of the goods (section 167).

v. Right to sue: - If a third person incurred a loss upon bailee than the baille has the right to sue the peons for the losses sustain by him.

vi. Right of Lien: - Lien is the right t retains possession of the property of goods belonging to another until some debt or claim is paid. Bailee has the right to retain the property in respect of which he has rendered some services or has charges as due (section 170).

Liabilities of Bailee; - the bailee has the following liabilities to pay,

i. Duty to take reasonable care: - According to section 151 “ in all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary procedure worked under similar circumstances take of his own goods of the same bulk quality and the value a the goods bailed.

ii. Duty not to make unauthorized use: - According to section 154 it is the duty of the bailee to use the goods according to the terms of the bailment. If the bailee makes an unauthorized use, he is liable to make compensations to the bailor.

iii. Duty not to mix the goods: - According to section 157 it is also duty of the bailee that he should not mix his goods with those of the bailor without bailer’s consent.

iv. Duty to return the goods: - Section 160 it is the duty of the bailee to return or deliver according to the bailor directions, the goods bailed, without demand, as soon as the time for which the they were bailed has expired, or the purpose for which they were bailed has been accomplished.

v. Duty to return increase: - In the absence of any contact to the contrary, the bailee is bound to deliver to the bailor any natural increase or profit which may have accrued from the goods bailed. (Section 163).

BENEFITS OF CROSSED CHEQUE

BENEFITS OF CROSSED CHEQUE

1. A drawer of a cheque, can, if he so desires cross it generally of specially.
2. If drawer issues an open cheque. any holder of it can cross it generally, convert a general crossing into special one or add the words "Not Negotiable"
3. Where a cheque is crossed specially, the banker to whom it is crossed may again cross it especially to another banker for collection.
4. Where an uncrossed cheque or a cheque crossed generally is sent to a banker for collection he may cross it especially to himself.

BENEFITS OF CROSSING

The crossing of cheques does not in any way restrict negotiation but afford many advantages. The risk consequent upon loss of cheque or that of its forger)' is minimized. The law requires of the paying banker to pay the proceeds of a crossed cheques only to a banker. The collecting banker on the other hand is legal expected to collect only for his customers and not for unknown person. Thus it is not possible for fraudulent person to obtain a payment without disclosing his identity.

TYPES OF BANK ACCOUNTS

TYPES OF BANK ACCOUNTS

FIXED OR TIME DEPOSIT

The deposits which are accepted by the bank under the conditions that they will not be payable on demand but will be payable on fixed or determinable future time or date are called fixed time or date are called fixed or time deposits.

These deposits represent such surplus funds of the depositors, which are not required by them for sufficiently long periods. Initially the banks used to accept such deposits, normally for a period of twelve months, after which they were renewable. In a developing economy where investment needs are most pressing and where investments have to be made for longer period than 12 month or 6 months. Of course the longer period, the higher is the rate of interest offered. Banker issue receipt for such deposits on their specially printed forms. Being receipt these cannot be negotiated.

Payment

Fixed deposit should ordinarily be presented by the depositor duly receipted/discharged on revenue stamps on its back on the due date of maturity. If not presented on the due date the amount is taken out of fixed deposit account and kept in a separate account in current account ledger.

If a customer desire to withdraw the amount of fixed deposit before its due date, the bank some time oblige him by repaying the principal amount and customer has to forego interest at one percent on the principal amount for the remaining period. Alternatively, the bank may an advance against the security of such a deposit. In such case, rate of interest charged by the bank on loan account is 1 to 2 % above the rate of interest paid by it on that particular fixed deposit.

Short-term deposits

This term generally applies to deposits placed with a bank for periods of less than six months. These are also termed as "special notice current accounts" which implies that these shall be with-draw able after giving notice for specified period, as may be agreed upon. Unlike fixed deposits they may or may not be for a specified amount. Further deposits can be made therein though withdrawal shall remain subject to the notice period. These accounts are maintained more or less, on the same pattern as current deposits though different sets of books are kept for recording transactions.

Deposits are to the bank as a back bone is to body of man. It is the life blood of a bank. Bank borrows money from the general public and by accepting deposits by offering suitable rates of interest on them or on simply a promise to repay on demand. With the deposits collected it carries day to day business of lending out to the needy persons at a higher rate of interest.

TYPES OF DEPOSITS

With the purpose and duration of deposits kept in bank can be classified in two categories.

1. Demand Deposits

2. Fixed or Time Deposits

DEMAND DEPOSITS

These deposits are payable by bank whenever demanded back depositors, these are

1. Current Accounts

2. Saving Bank Accounts

3. Call deposits

CURRENT ACCOUNTS: It a statutory requirement of a bank maintain current accounts. These accounts are opened in a current Account Ledger for customers who have to make frequent deposits into their accounts and make numerous payments by cheques. According to all Pakistan Inter Bank Agreement no interest is paid on current account deposits. Customers are asked to maintain a fixed minimum balance. In case this minimum balance is not maintained at the bank, charges called "incidental charges" are recovered by the bank from the accounts of such defaulters.

Printed cheque books are supplied by banks. Statements of accounts are provided to customers generally at monthly intervals. Bank collects outstation cheques for their customers. Periodical remittance on behalf of the customer on account of premia. rent subscription etc. is also made if desired. These are called "standing instruction''. Current accounts are balanced at least once in a weak.

SAVING BANK ACCOUNT: Saving accounts are opened to inculcate and encourage the habit of saving in citizens of a nation. The facilities are provided for depositing small sums of money. Interest is paid at the end of June and December at fixed rate on minimum monthly balance on such deposits to encourage depositors to save as much as they can. Restrictions on withdrawals are laid down on such accounts and saving bank account holder is not allowed to withdraw amount more than fixed amount in one week. Ordinarily two withdrawals are allowed to be made in one week. Similarly a prior notice (7 to 15 days) is necessary when a customer wishes to withdraw a large amount of money from the bank. To make it more popular cheque books are issued to the depositors and customers are also opened for students in schools, colleges and industrial unit employees. Some banks depute their staff to visit schools, colleges and industrial units regularly to provide deposit / withdrawals facility on saving bank accounts at their customer door steps. Usually pass books are issued by the bank to their saving bank account holder wherein details of all the transactions made by them on the account recorded.

PRINCIPALS OF LENDING FOR FINANCIAL INSTITUTIONS

PRINCIPALS OF LENDING FOR FINANCIAL INSTITUTIONS

The core function of commercial banks is lending and borrowing. Their deposits comprise mainly borrowed money from various customers on various accounts. It is the duty of banks to be careful while lending their depositors money. For this purpose banks follow certain rules as per detail given below:-

1. SAFETY: Whatever money the bank hold is that of their customer who have entrusted the banker with it only because of the confidence they have in the expert handling of money by bank. The banker must ensure that his depositor’s money is advance to safe hands and there is no risk of loss.

2. CHARACTER: A borrower’s character is the indicator of his intention to repay the advance, since his honesty and integrity is the primary importance. It is obligatory on the banker to ensure that his borrower is person of character and enough capacity to pay the borrowed money including interest thereon. This can be judged with the help of his past record, his experience in that particular line and lastly the amount of capital he himself has invested in his business. If the limit is commensurate with the capital invested in the business and with the preview of this framework, a banker can presume that his money is safe in the hands of such a customer.

3. CAPACITY: This is the ability of the management to access how successful a business has been in the past and what the future possibilities are. A businessman may not have vast financial resources but with sound management abilities including into a specific business he may make his business very profitable. On the other hand if a person has not insight into the particular there is more chance of loss to the banker.

4. CAPITAL: The money invested by the proprietors represents their faith in the business and its future. The role commercial is to provide short term capital for consumer and industry. Some time bank becomes partner with the businessmen.

5. LIQUIDITY: All the money advanced by the banker to customer is repayable in lump sum on demand. It means that banker can call the money back at any time. Liquidity means the possibility of recovering the advances in emergency. Banker must ensure that the money he lending is not blocked for an undue long time and the borrowers are in such a position as to pay back the entire amount on short notice. For this purpose it important for the banker to study his borrower’s assets to liquidity.

6. DISPERSAL: The banker must ensure that his funds are not invested in specific sectors like textile industry, heavy engineering or agriculture etc. He must see that from his available funds he advances them to wide range of sector like commerce, industry, farming, agriculture, small business, housing projects and various other financial concerns in order of priorities.

Dispersal of advances is very necessary from the point of security as well because it reduces the risk of recovery when something goes wrong in one particular sector or in one field.

7. REMUNERATION: A main source of banker’s income is the interest charged on the money borrowed by customer. The rate of interest to be charged for advances depends on the type of security offered to bank and the duration for which advance is allowed. When the security offered is sound and easily cashable, the banker may consider charging lower rate of interest. The banker should prefer a borrower who is willing to offer a higher rate of interest on a comparatively lesser risk.

8. SUITABILITY: Suitability means that advance should be allowed not only to the carefully selected and suitable borrowers but also in keeping with the overall national development plans chalked out by the authorities concerned. Before accommodating a borrower the banker should ensure that the lending is for a purpose in conformity with the current national credit policy laid down by the central bank of the county.

PAPER MONEY

PAPER MONEY

Man has used variety of commodities as a medium of exchange. The Barter system was replaced by commodity money. The next evolution of money was the use of precious metals like gold and sliver. With the growth of trade and commerce activities, efforts were made to find out a superior kind of monetary medium. Paper money was then discovered to be the most suitable medium of exchange for all transactions.

Paper money refers to the currency notes issued by the state or central bank. In Pakistan, 1, 2, 5, rupee coins issued by the government where as other currency notes (10, 50, 100, 500, WOO) are issued by the State Bank of Pakistan. In all countries of the world paper money is widely accepted as a medium of exchange because it is legal tender and people are legally bound to accept it. China is the originator of paper money. (Paper money was introduced in china in ninth century.) Now, in almost all the countries of the world the inconvertible paper money is used as a medium of exchange and standard of value because it is legal tender.

Definition:-
L F. E. PERRY

"Paper money is a document representing money, such as bank notes promissory
notes, bill of exchange or postal orders.

2. PROF. HANSON:

"Paper money means the paper instruments such as bank notes, cheques, bill and other forms which take the place of money and act as a currency or circulation medium. "

3. PROF. GREENER:

"Paper money means a document with a value stated on it but no value in it (like coins). "

KINDS OF PAPERS MONEY

1. Convertible Paper Money

Convertible paper money is that form of money that carries a promise of issuing authority that it can be converted into the standard metal money on demand. The standard of money metal consists of full-bodied coins of metal made of gold and silver is called as redeemable paper money. The total supply of convertible papery is fully backed by the standard metal money and is called covered issue.

2. Inconvertible Paper Money

The inconvertible paper money is that money, which is not backed by any metallic reserve and cannot be converted into standard money metal at the option of holder. The people accept inconvertible paper in the exchange of goods and services as it is regulated by the state on the state authority.

The paper money has certain advantages in its uses as a medium of exchange store of value, standard of value and standard of deferred payment.

ADVANTAGES:

1. Easy portability

The transfer of paper money from one place to another is easy and cheaper than metallic money. Paper money has a high value and less weight and small bulk, as it is easily portable even for carrying out large transactions.

2. Easy Handling

The paper money is widely accepted as a medium of exchange and standard of value due to easy handling. It is easy to count, keep and deliver.

3. Uniformity

The paper money has another advantage that it is uniform in size, color, material, shape etc. The holder least bothers for possession of new or old money. The holder least bothers for possession of new or old money. Further there is no ambiguity in it.

4. Flexibility

Paper money is flexible and it can be easily molded, folded and converted in any size and shape. So it becomes easy to put into pocket, bag or any other place.

5. Elasticity

Paper money is elastic in nature. Its supply can easily expand in accordance with the money needs of the country. The volume of money can be increased or decreased

according to the requirement.

6. Economical

Paper money is very economical regarding its material printing and wear and tear. We can bring very large quantity of paper money in the market on a very little cost. Moreover its printing is very easy and less time consuming as compared to metallic money.

7. No Loss of Metal

Loss of wear and tear of repeated use of coins made of precious metal .is saved with the use of paper money. Paper money can be used for many years and has no loss of value.

8. Less chance of Imitation

There are very less chance of fraud or imitation due to unique raw material paper money. Beside it is printed and styled in a very technical method.

9. Cognizability

i The paper money is easily recognizable. The holder is now saved from the tension of testing the geniuses of the money material.

10. Storability

Paper money possesses the quality of storability. Wealth can be stored in the form of paper money for a long period of time without loss of its value.

11. Divisibility

Paper money is divisible. It can be divided into the smaller money units. Without losing its value. 1000 rupees note can be divided into a thousand or even more parts without losing it value.

12. Easy counting

It is more convenient to count notes than coins. The counting and the arrangement of notes take less time as compared metal coins. Billions of notes can be counted in very short time.

13. Low Expenses

The printing of paper money is cheaper than metallic money. Minting is lengthy and costly process. Minting, refining and minting of coins cost many times more than printing of paper money. The raw material of paper money is cheaper and easily available.

14. Emergency Needs of Government

Paper money helps the government in time of emergency such as war and floods. The Government can raise necessary funds by issuing notes to tide over emergencies. Paper money sometime can be printed even without reserves. But in case metallic money coins cannot be minted without reserves. But in case of metallic money coins cannot be minted without gold or silver.

15. Deficit Financing

Filling the gap between less income and more expenditure by borrowing or printing notes without any reserve is deficit financing. It must be utilized skillfully, if deficit financing is used efficiently then it is beneficial, otherwise it results in economic disasters.

DISADVANTAGES:

1. Less Durable:

The paper lacks the essential quality of durability of money. It can be easily destroyed by the fire, water etc. It is not durable on the other hand metallic money is ling lasting and durable.

2. Less Stable Value:

The value of paper money is less stable as compared to the metallic money as paper money is not fully backed. Sometimes it is issued without keeping any reserve in form of gold or silver. Paper money is elastic it can be increased or decreased. The value of money rests upon the quantity of money and fluctuates with the quantity of money.

3. Small Denomination:

Paper is not suitable for all denominations (values) of money. For amount of so small as 1,2,5, rupees paper is less satisfactory than metallic money.

4. Limited Acceptability:

The acceptability of paper money is limited. It can circulate, as money in a limited and narrow area than metallic money. Paper money is normally acceptable only within the boundaries of a country because it has no real value as metallic money had.

5. Value Precarious:

The value of paper money is very precarious although its value falls when there is a rising price level in the country. In case the government demonetizes or cancel it, the holder will have worthless pieces of paper in his possession.

6. Fluctuation in Foreign Exchange:

In case of paper money there is no stability of exchange value of currencies of the various countries. The devaluation of currency of one country up0sets the foreign exchange rates of all other.

7. Less Confidence:

As value of paper money is less stable and it has no real value in it so people have less confidence in paper money as compared to metallic money.

8. Loss and Theft:

Paper money has also problem of lost and theft. It can be easily lost or stolen.

9. Chances of Over or Under Issue

It is so tempting and easy to print paper notes. The increase in money supply unmatched by production causes inflation or deflation. The price level goes up and value of money goes down in case of over issue. In the same way, under issue of money also creates many problems.