7

Auxiliaries to Trade
7.1 Introduction
You are already familiar with the terms industry, trade and commerce.
All these are interdependent and cannot be seen in isolation. Auxiliaries
to trade or aids to trade also provide necessary support to trade. In the
present lesson we are concerned with auxiliaries to trade, such as
transport, warehousing, banking and finance, and insurance.
7.2 Objectives
After studying this lesson you will be able to:
explain the importance of transport;
enlist the activities related to transport;
enumerate various modes of transport;
explain the meaning of warehousing and its uses;
describe the suitable arrangements for storage;
explain the functions of warehousing;
define the terms Insurance and Insurance premium;
enumerate the uses of insurance;
identify the types of risks covered by insurance;
disucss the role of finance and banking;
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describe the term commercial bank and its functions; and
identify various types of bank financing and credit.
7.3 Importance of Transport with reference to Trade
(i) Transport plays a very important role in marketing and distribution
of goods both within a country as well as outside.
(ii) Transport helps in bring about stable and uniform prices in
different markets as traders are able to equalise the supply of
goods at different places according to demand.
(iii) Consumers have the benefit of getting goods according to their
needs as supply can be adjusted to demand through transport.
(iv) Producers can concentrate on production activities as they can
fulfill their requirements of raw materials conveniently through
transport.
(v) Traders, producers and consumers living in different parts of the
world can interact with each other with the help of transport.
7.4 Activities relating to Transport
Various activities relating to transport are as follows:
(i) Carrying goods and passengers
(ii) Carrying raw materials
(iii) Carrying live-stock
(iv) Carrying oil and gas through pipe line transport
(v) Carrying mail
(vi) Movement of raw materials and goods within a factory.
7.5 Modes of Transport
The various modes of transport can be divided into the following three
categories:
(i) Land Transport, (ii) Water Transport, (iii) Air Transport
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(i) Land Transport:
It can be sub-divided into two: (a) Road Transport (b) Rail
Transport.
Road Transport: The means of transport by road include carts,
thelas, cycles, rickshaws, tempos, trucks, etc.
Rail Transport: It consists of carriage of goods, livestock,
pasengers, etc. by railways.
Motor transport and rail transport are two important means of
land transport. Motor transport is used to carry heavy goods but
has limited carrying capacity. Rail transport is used to carry
bulky and heavy goods and goods in large quantities.
(ii) Water Transport:
It includes carriage by inland water-ways and ocean transport.
Inland Waterways: These include canals and rivers. Canals are
artificial water ways constructed for the purpose of navigation
and irrigation. Rivers are natural waterways. Canals as well as
rivers are suitable for plying boats and steamers for carrying
goods and passengers. Inland waterways are used in home trade
to carry bulky goods.
Ocean Transport: The means of transport by sea or ocean consist
of ships which carry goods from one country to another separated
by sea and oceans. There are two types of ships available for
transport of goods by sea or ocean: Liners and Tramps.
Liners are ships owned by big companies which have fixed routes
and fixed time schedules to carry goods and passengers.
Tramps are owned by small shipping companies which do not
have fixed time schedules or fixed routes but carry cargo only
when they have full load.
(iii) Air Transport:
Generally less bulky goods of high value are transported by air.
Though air transport is relatively more expensive, it is the
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speediest means of transport and therefore more time saving than
other means of transport.
The following chart shows the various modes of transport.
Modes of Transport
Land Transport Water Transport Air Transport
Inland Water Transport Ocean Transport
Liners Tramps
Canal Transport River Transport
Road Rail
Transport Transport
Intext Question 7.1
I. Match the following
(A) (B)
(i) Inland water ways (a) Foreign trade
(ii) Ocean transport (b) Less bulky and valuable items
(iii) Air transport (c) Home Trade
(iv) Rail Transport (d) Truck
(v) Road Transport (e) Large quantity of goods
7.6 Warehousing
Meaning and uses
A warehouse is an establishment for the storage of goods. Warehousing
means storing goods in the warehouse.
The uses of warehousing are outlined below:
(i) It helps merchants and manufacturers in storing their goods in
case they do not have their own warehouses or their warehouses
have limited capacity.
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(ii) Special warehouses which store imported goods provide importers
the facility of paying custom duties in instalments, thus saving
large amounts of capital from being blocked.
(iii) It facilitates the transfer of ownership of goods stored in
warehouses without actual delivery of the same. The owner gets
a document known as a warehouse warrant from the warehouse
keeper at the time of keeping his goods in the warehouse. The
owner can sell the goods by delivery of the warrant. Thus, goods
kept in a warehouse can change hands several times through a
warehouse warrant without actual delivery.
(iv) It provides the manufacturer with the facility of selling his goods
at favourable prices depending upon the market situation;
particularly warehouses situated near the main trading centres.
(v) Warehousing enables the consumer to consume perishable goods,
if they so like, throughout the year by maintaining a regular
supply of goods like fruits, eggs and vegetables etc. with the
use of cold storage.
7.7 Suitable arrangements for Storage
Storage is an important function in the marketing process. This function
involves holding of goods from the time they are produced until they
are needed for consumption. Hence necessary arrangements must be
made for proper storage of goods in the warehouse. The following
arrangements are considered to be necessary for proper storage of goods:
(i) Inspection of goods is necessary before they are accepted for
storage to check quantity or number.
(ii) Storage facilities should be made available near the railway
sidings, air-port and sea port where the goods can be loaded and
unloaded conveniently.
(iii) Sufficient space should be provided to keep the goods in proper
order.
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(iv) Cold storage facilities should be provided for perishable goods
such as vegetables, fruits, eggs and butter.
(v) Facilities for loading and unloading should be provided near
storage.
(vi) Availability of shelves, stacks, bins, etc. should be ensured for
proper arrangement of goods so that they can be easily taken
away without much loss of time.
(vii) Arrangement for safety and security of goods must be provided
against fire, theft, and exposure to water, dust etc.
7.8 Functions of Warehousing
The functions of warehousing may be stated as follows:
(i) The basic function of warehousing is to store large quantities of
goods and made available as and when required.
(ii) Warehousing ensures supply of goods in the market as and when
needed. Thus, it prevents wide fluctuations in prices. In other
words, it stabilises the prices by regulating the supply of goods.
(iii) Once the goods are handed over to the warehouse keeper for
storage, the whole responsibility of the goods so stored passes
on to the warehouse-keeper. Thus the risk of loss or damage to
goods in storage is borne by the warehouse keeper.
(iv) Sometime the warehouse-keeper also performs the functions of
grading and branding of goods on behalf of the manufacturer,
wholesaler or the importer of goods.
Intext Question 7.2
Choose the appropriate words from the following to fill up the
blanks.
Price, Warehouse-keeper, cold storage, Warrant, Import duties.
(i) The ownership of goods kept in warehouse can be
transferred by mere delivery of the warehouse ___________.
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(ii) Perishable goods require _________________facilities.
(iii) Importer can pay _______________________ in
instalments for goods kept in special warehouses.
(iv) The person who issues warehouse warrant for goods kept
in a warehouse is known as a ______________________.
(v) Warehousing prevents wide fluctuation in ____________.
7.9 Insurance
You are already familiar with the meaning of insurance. The owner of
goods can be covered for risk of loss if he has a contract with the
insurance company known as insurance contract.
The term 'Insurance' refers to a contract between two parties, one known
as insured and the other insurer, whereby the insurer agrees to protect
the insured against risks of loss or damage or liability on payment of
a certain amount by the insured known as premium. This contract is
put in writing and is known as Insurance Policy. The person whose
risk is insured is called insured or Assured and the person or the
company which insures is known as insurer, Assurer or Under
writer. The consideration in return for which the insurer agrees to
make good the loss is known as Premium. This premium may be paid
by the insured monthly, quarterly, half-yearly or annually.
A contract of insurance can be easily explained with the help of an
example. Suppose A owns a house worth Rs.10,00,000. He gets it
insured for Rs. 5,00,000 against fire with an insurance company by
paying Rs.10,000. These terms are put in writing on a document. In the
given example, A the owner of the house is known as insured, the
insurance company is known as insurer, the subject matter of insurance
is the house, Rs.10,000 which is paid to the insurance company is
the Premium, and the document on which the terms are written is
known as Policy.
Now, in the given example, if the entire house is damaged due to fire,
the loss or damage can be claimed only upto the value insured i.e., Rs.
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5 lakh for which there was insurance cover (policy). In other words,
in a contract of insurance only the actual loss can be claimed only upto
the value specified in the insurance policy.
7.10 Risks covered by Insurance
The type of risks covered by insurance varies according to the subject
of insurance. Risk is an unexpected happening of some future event
which can be insured with the insurance company at the time of
insurance contract. The various types of risks which can be insured
may be grouped as follows:
(i) Life Insurance : old age and death.
(ii) Fire Insurance : risk of loss or damage to property, goods and
consequential losses caused by fire.
(iii) Marine Insurance : risk of loss or damage to ship or cargo.
(iv) General Insurance : risk of loss or damage due to theft and
burglary in a premises, risk of loss or damage to properties and
assets, and risk of loss or damage due to accidents.
7.11 Uses of Insurance
Insurance plays an important role in the present commercial world as
explained below:
(i) It protects business from losses which may arise due to fire,
theft, burglary, etc. as it compensates for the loss to the insured.
(ii) Business is protected from immediate financial problem due to
loss arising from insured events because the loss can be recovered
within a short period.
(iii) Insurance enables the risk of loss to be spread over a large
number of people; the premium is charged from large number of
persons but very few have claim for loss.
(iv) The insured does not bear the risk of loss alone.
(v) Business firms can concentrate on business activity and can grow
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with the protection given by the insurance company against
various risks.
(vi) To a great extent insurance has contributed to the increase in
volume of international trade through coverage of losses in transit.
(vii) It provides employment opportunities to a large number of people.
Intext Questions 7.3
I. State whether the following statements are true or false:
(i) The terms and conditions of insurance contract are written
in the insurance policy.
(ii) The person whose risk is insured is known as insurer.
(iii) The person who bears the risk is known as insured.
(iv) Insured pays insurance premium to the insurer.
(v) Actual loss or damage suffered can be claimed from the
insurer even if it is more than the value specified in the
insurance cover (policy).
II. Match the following :
(A) (B)
(i) Life Insurance (a) Property or goods
(ii) Fire Insurance (b) Old age
(iii) General Insurance (c) Ship
(iv) Marine Insurance (d) Accident
7.12 Finance and Banking
Banking :
Banking means acceptance of deposits from the public and giving credit
or loans. In simple words, Banking means the business of a bank or
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a banker, and bank means an institution which deals in money and
credit.
Role of Finance and Banking
Finance is the life blood of commerce and industry. Every business
firm needs funds to meet various types of requirement. Some funds are
required for long periods while some funds are required for a short
period in order to carry out day to day work. Bank loans and credit are
important sources of finance for trade and industry. Banks occupy an
important place in the modern business world. No country can make
industrial and commercial progress without a well organized banking
system. Banks offer opportunities of investment and safe custody of
deposits. They encourage the habit of saving among the public. Banks
deal in money and credit. They mobilise small savings and channelise
them to more productive uses. By providing adequate funds to business
firms, banks enable management to generate further wealth for the
good of society. They facilitate settlement of debts and transfer of
money from one place to another. In addition to these, banks also
assist consumers to finance their purchases of costly goods and services.
Thus, banking and finance are indispensable spokes in the wheels of
commerce and industry.
Commercial Bank
A commercial bank may be defined as a bank that accepts deposits
withdrawable on demand, grants loans and advances and renders a
number of other services.
7.13 Functions of Commercial Banks
The main functions of a commercial bank may be broadly outlined as
follows:
(i) Accepting Deposits :
Commercial banks receive deposits from individuals, firms and other
institutions. Three types of deposits are usually accepted i.e., (a) Fixed
deposits, (b)Savings deposits, and (c) Current deposits.
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(a) Fixed Deposits: These deposits are accepted for a fixed period
of time ranging from a minimum of 15 days. For example it may
be for 3 months, 6 months, 1 year, 2 years or more. The rate of
interest depends on the period of deposit and it is higher than
that of other types of deposits.
(b) Saving Deposits: These are deposits from which withdrawals
can be made only to a limited number of times as fixed by a
bank where deposits can be made as and when the depositor
likes. The rate of interest allowed is higher than that on a current
deposit but lower than that on a fixed deposit.
(c) Current Deposits: On current deposits there is no restriction on
the number of withdrawals and deposit of money. Interest is not
generally allowed on such deposits; even if it is allowed, it is
very nominal.
(ii) Lending Money:
Banks grant financial assistance with or without security. These loans
are in the form of cash credit, overdrafts, loans and advances. Banks
charge interest on loans. These will be discussed in the next section.
(iii) Agency Functions:
Agency functions are those functions which are rendered by banks as
agents to their depositors and borrowers. The main functions are listed
below:-
(a) Payment of insurance premium, subscriptions, interest, rent, etc.
(b) Collection of cheques, bills and promissory notes.
(c) Collection of dividend and interest on shares and debentures
(d) Collection of salaries, pensions, etc.
(e) Purchase of shares and bonds on behalf of customers
(f) Banks stand guarantee for customers dues.
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(iv) General Services:
Besides agency services, banks perform many other services of general
utility to the public as well as to the customers, such as issue of letter
of credit and travellers cheques, acceptance of bills on behalf of
customers, acting as a referee regarding financial position of customers,
undertaking foreign exchange business, underwriting loans floated by
Government and public bodies, safe keeping of valuables in lockers,
and issue of credit card.
7.14 Types of Bank Financing and Credit
Banks provide financial assistance and grant credit facilities. The
different types of finance and credit provided by banks are given below:
(i) Loans and Advances:
Banks grant loans and advances for short, medium and long term
generally against security.
(ii) Cash-credit:
It is an arrangement by which the customer can avail of credit upto a
certain limit from his bank. Interest is charged only on the amount
actually used by customer. It is generally granted against security.
(iii) Overdraft:
When a depositor is allowed to draw more than his bank balance but
upto a certain limit, it is known as overdraft.
(iv) Discounting of Bills:
The holder of bills receivable (B/R) can encash the same from the
bank before its due date. The bank pays the face value less discount
which is the interest at current rate upto due date.
(v) Loans against documents of title:
A customer can get a loan against documents of title to goods such as
Railway Receipt, Bill of Lading, etc.
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(vi) Loan against life insurance policy, FDR and NSC, etc:
Banks also grant loans against life insurance policy, fixed deposit receipt,
National Saving Certificates, and other securities.
Intext Questions 7.4
I. Fill in the blanks
(i) Fixed Deposit Receipt is issued when the deposit is for a
_____________ period.
(ii) There are no restrictions on the number of withdrawals in
____________ deposits.
(iii) The rate of interest on ___________ deposits is higher
than current deposits but less than that of fixed deposits.
(iv) When an account-holder can withdraw more than his bank
balance upto a certain limit it is called ____________
facility.
II Match the following:
(A) (B)
(i) Agency function (a) Cash credit
(ii) General services (b) Collection of cheques
(iii) Lending money (c) Credit card
(iv) Fixed deposits (d) Limited number of
withdrawals.
(v) Current deposits (e) Fixed period
(vi) Savings deposits (f) Unlimited number of
withdrawals.
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7.15 What You Have Learnt
Transport
Transport relates to carriage of goods and passengers within and outside
a country.
Importance of transport with reference to Trade
1. It facilitates home trade and foreign trade.
2. It equalizes supply of goods in the market and thus ensures
stable and uniform prices.
3. Consumers can get goods according to their needs.
4. Producers can concentrate on the production process.
5. Producers, traders and consumers can interact with each other.
Activities relating to transport
Carrying of goods and passengers, raw material, live stock, oil and gas,
mail, and movement of raw materials and goods within the factory.
Modes of Transport
Modes of transport are divided into three categories:
(1) Land transport, (2) Water transport, (3) Air transport.
Land Transport :
It includes road and rail transport.
Water Transport :
It includes inland water ways and ocean transport. Ocean transport
further includes carriage by ships which may be tramps and liners.
Air transport :
It carries passengers and less bulky and valuable items to far off places.
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Warehousing
It means storing goods in the warehouse.
Uses of Warehousing
1. It helps in storing goods.
2. Payment of customs duties in instalments.
3. Transfer of ownership of goods without actual delivery.
4. Benefit of selling goods at favourable prices.
5. Availability of perishable goods throughout the year.
Suitable arrangement for storage
1. Inspection of goods
2. Storage facilities near railway sidings, Airport and Seaport
3. Sufficient space
4. Cold storage facilities
5. Shelves, stacks and bins, etc.
6. Safety and security of goods.
Functions of Warehousing
1. Store and preserve large quantities of goods.
2. Stabilises prices by regulating supply of goods.
3. The risk of loss or damage is borne by warehouse-keeper.
4. Service of grading and branding is provided.
Insurance
It is a contract between the insured and an insurance company (insurer)
whereby the insurer agrees to protect the insured against risks of loss
or damage or liability on payment of certain amount i.e. premium. The
document on which the contract is written is called an insurance policy.
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Risks covered by Insurance
Old age and death, loss or damage to property and goods, ship and
cargo, risk of loss or damage due to theft, burglary, and accidents.
Uses of Insurance
1. Protects business from losses due to fire, theft and burglary.
2. Protects business from immediate financial problem due to
happening of insured events.
3. Spreads risk of loss over a large number of people
4. Leads to growth of business.
5. Increases the volume of international trade.
6. Provides employment opportunities.
Finance and Banking
Banking means the business of a bank or a banker and bank refes to
an institution which deals in money and credit.
Role of Finance and Banking
The enable the management of business firms to generate further wealth
for the good of society because they mobilise small savings and
channelise them to more productive uses. Banking and finance are
indispensable spokes in the wheels of commerce and industry.
Commercial Banks
They accept deposits, advances, loans, and render various services.
Functions of commercial banks
Receiving deposits, lending money, agency functions, and general
services.
Types of Bank financing and credit
Loans and advances, cash credit, overdraft, discounting of bills, loan
Auxiliaries to Trade :: 25
against document of titles, loan against B/R, FDR and Life Insurance
Policy, etc.
7.16 Terminal Exercise
1. State the various activities relating to transport.
2. State any two modes of Water transport.
3. Enumerate the various modes of Road transport.
4. Briefly explain : (a) Liner, (b) Tramp, (c) Warehouse warrant,
(d) Overdraft, (e) Cash credit, (f) Current deposits, (g) fixed
deposits.
5. Explain briefly the importance of transport with reference to
trade.
6. Explain briefly the various modes of transport.
7. Explain the functions of warehousing.
8. What is meant by Warehousing? Enumerate the steps which are
necessary for suitable arrangements for storage of goods.
9. Explain the uses of warehousing to a manufacturer, trader and
importer of goods.
10. State the various uses of insurance.
11. What is meant by insurance? State the risks covered by different
types of insurance contracts.
12. Explain briefly the role of finance and banking in development
of commerce and industry.
13. What is a commercial bank? Explain briefly the various types
of bank deposits.
14. Explain the functions of a commercial banks.
15. Define banking and explain briefly the various types of bank
financing and credit.
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7.17 Answers to Intext Questions
7.1 (i) c (ii) a (iii) b (iv) e (v) d
7.2 (i) Warrant, (ii) Cold storage, (iii) Import duties,
(iv) Warehouse-keeper, (v) Price
7.3 I. (i) true, (ii) false, (iii) false, (iv) true, (v) false.
II. (i) b, (ii) a, (iii) d, (iv) c.
7.4 I. (i) fixed, (ii) current, (iii) savings, (iv) overdraft
II. (i) b, (ii) c, (iii) a, (iv) e, (v) f, (vi) d.