Banking &

Monetary Policy
KUSHAL JAIN
Money

In a modern economy money consists mainly of currency notes and coins issued by the monetary authority
of the country.

In India currency notes are issued by the Reserve Bank of India (RBI), which is the monetary authority in
India. However, coins are issued by the Government of India.

Apart from currency notes and coins, the balance in savings, or current account deposits, held by the public
in commercial banks is also considered money since cheques drawn on these accounts are used to settle
transactions.

Such deposits are called demand deposits as they are payable by the bank on demand from the account-
holder. Other deposits, e.g. fixed deposits, have a fixed period to maturity and are referred to as time
deposits .
 Legal tender

Though a hundred-rupee note can be used to obtain commodities worth Rs 100 from a shop, the value of the paper
itself is negligible – certainly less than Rs 100.

Similarly, the value of the metal in a five-rupee coin is probably not worth Rs 5. Why then do people accept such
notes and coins in exchange of goods which are apparently more valuable than these?

The value of the currency notes and coins is derived from the guarantee provided by the issuing authority of these
items.

Every currency note bears on its face a promise from the Governor of RBI that if someone produces the note to RBI,
or any other commercial bank, RBI will be responsible forgiving the person purchasing power equal to the value
printed on the note. The same is also true of coins.
Legal tender

Currency notes and coins are called fiat money.

They do not have intrinsic value like a gold or silver coin.

They are also called legal tenders as they cannot be refused by any citizen of the
country for settlement of any kind of transaction.

Cheques drawn on savings or current accounts, however, can be refused by anyone as

a mode of payment. Hence, demand deposits are not legal tenders.
When Was Money Invented?

B e f o r e m o n e y wa s i nve nte d, p e o p l e b a r t e r e d f o r g o o d s a n d s e r vi c e s. I t wa s n’ t u n t i l a b o u t 5 , 0 0 0
ye a r s a g o t h a t t h e M e s o p o t a mia n p e o p l e c r e a t e d t h e s h e ke l , w h i c h i s c o n s i d e r e d t h e f i r s t k n o w n
f o r m o f c u r r e n c y. G o l d a n d s i l ve r c o i n s d a t e b a c k t o a r o u n d 6 5 0 t o 6 0 0 B . C . w h e n s t a m p e d c o i n s
w e r e u s e d t o p a y a r m i e s . S o m e e v i d e nc e s u g g e s ts t h a t m e t a l c o i n s m a y b e a s o l d a s 1 2 5 0 B . C .

W h e n t h e r e wa s n o c u r r e n c y, p e o p l e t ra d e d g o o d s a n d s e r v i c e s f o r w h a t t h e y n e e d e d. O n e f a r m e r
m i g ht t ra d e l i ve s to c k f o r ve g e ta bl e s , w h i l e a n o t h e r m a y t ra d e l a b o r o r l u m be r f o r l i ve s to c k . T h e s e
t ra n s a cti o n s w e r e t h e e a r l y b u i l di ng b l o c k s o f o u r m o d e r n e c o n o my a n d w o u l d g o o n t o c r e a t e t h e
f u t u r e o f m o n e y t h e w o r l d k n o w s t o d a y.

T h e h i s t o r y o f b a r t e ri n g d a t e s a l l t h e wa y b a c k t o 6 0 0 0 B . C . w h e n M e s o p o t a mi a n t r i be s i n t r o d uc e d
t h e c o n c e p t t o t h e P h o e n i c i a ns . G o o d s w e r e e x c h a ng e d f o r e a c h o t h e r i n t h e a b s e nc e o f m o n e y,
i n c l udi ng t h i ng s l i ke t e a , s a l t , w e a p o n s a n d f o o d . A s t i m e w e n t o n , b a r t e ri n g c o n t i n ue d t o e vo l ve ,
w i t h C o l o n i a l A m e r i ca ns t ra d i n g p e l ts , c r o p s a n d m u s ke t s .
First Metal Money - Coins

To a d d r e s s th e i n co nven ien ce o f ca r r y in g m e ta l co i n s , r e p r e s en ta tive m o n e y e m e r g e d. Th is

f o r m o f m o n e y wa s b a cke d b y a co m m o d ity, u s u ally g o l d o r s i l ver, h eld i n r e s e r ve. Pe o p l e co uld
e xch a n g e th e r e p r e s e ntative m o n e y f o r a s p e ci f ic a m o u n t o f th e co m m o d ity it r e p r e s e nted
( e . g ., a g ol d ce r ti f icate r e p r e s e n ting a ce r ta in a m o unt of g old ) .

Th e f i r s t m etal m o n e y d a te s b a ck to 1 0 0 0 B. C . C h i n a . Th es e co i n s w e r e m a d e f r o m s ta m p e d
p i e ce s o f va l u ab le m e ta l, s u ch a s b r o n ze a n d co p p e r. E a r l y i te ra tion s o f co i n s w e r e a l s o u s e d b y
a n ci e n t G r e e k s , s tar ting a r o u n d 6 5 0 B. C .

O ve r ti m e , th e s e co i n s w o u l d e vo l ve to b e m a d e f r o m th e s i l ve r a n d g o l d w e a s s o ci a te w i th
m o n e y to d ay. C o i n s w e r e a h u g e m i l es ton e i n th e h i s to r y o f m o n e y b e ca u s e th e y w e r e o n e o f
th e f i r s t cu r r e n ci es th a t a l l o w ed p e ople to p ay b y co u n t ( n u m b e r o f co i n s ) ra th e r th a n w e i g h t.
 History of Metallic Money in India

1 . A n c i e nt I n d i a ( P r e - 6 t h c e n t u r y B C E ) : B a r te r Sys t e m : L i ke i n m a ny a n c i e nt c i v i l i za t i o n s , t h e e a r l y e co n o my i n a n c i e nt
I n d i a re l i e d o n a s i m p l e b a r te r sy s te m , w h e re g o o d s a n d s e r v i c e s w e re exc h a n g e d d i re c t l y w i t h o u t a s ta n d a rd i ze d
m e d i u m o f exc h a n g e .

2 . M a u r ya a n d G u p ta E m p i re s ( 4 t h c e n t u r y B C E - 6 t h c e n t u r y C E ) : P u n c h - M a r ke d C o i n s : T h e e a r l i e s t k n o w n co i n s u s e d
i n I n d i a w e re p u n c h - m a r ke d co i n s , b e l i ev e d to h av e b e e n u s e d d u r i n g t h e M a u r ya E m p i re ( c i rca 4 t h to 2 n d c e nt u r y
B C E ) a n d G u p ta E m p i re ( 4 t h to 6 t h c e nt u r y C E ) . T h e s e w e re s m a l l p i e c e s o f m eta l w i t h sy m b o l s p u n c h e d o n t h e m to
d e n o te t h e i r va l u e a n d a u t h e nt i c i t y.

3 . M e d i eva l I n d i a ( 6 t h c e n t u r y - 1 7 t h c e n t u r y C E ) : G o l d a n d S i l ve r C o i n s : Va r i o u s k i n g d o m s a n d d y n a s t i e s i n m e d i eva l
I n d i a m i nte d t h e i r o w n g o l d a n d s i l v e r co i n s . T h e s e co i n s w e re o f te n b a s e d o n t h e s ta n d a rd o f p u r i t y a n d w e i g ht ,
ref l e c t i n g t h e re g i o n ' s e co n o mi c a c t i v i t y.

4 . M u g h a l E m p i r e ( 1 6 t h c e n t u r y - 1 9 t h c e n t u r y C E ) : I n t ro d u c t i o n o f R u p e e : T h e M u g h a l E m p i re i nt ro d u c e d t h e s i l v e r
r u p e e d u r i n g t h e re i g n o f E m p e ro r S h e r S h a h S u r i i n t h e 1 6 t h c e nt u r y. T h e r u p e e b e ca m e a s ta n d a rd i zed c u r re n c y a n d
co nt i n u e d to b e u s e d d u r i n g t h e M u g h a l e ra a n d b ey o n d .
Complexities of Metallic Money

1 . We i g ht a n d B u l k : M eta l l i c co i n s we re h e av y a n d c u m b e rs ome , e s p e c i al l y fo r l a rge t ra n sac ti ons o r

i nte r national t ra d e. C a r r yi ng a s i g n if i cant a m o u nt o f m eta l fo r t ra ns act ions wa s i m p ra c tical.

2 . S ta n d ard izatio n a n d A u th e ntic ity : E n s u r i ng t h e we i g ht , p u r i t y, a n d a u t he nti ci ty o f m eta l l i c co i n s wa s

c h a l l e ngi ng. Va r i ati ons i n m eta l co ntent a n d q u a l ity co u l d l e a d to d i s p u te s a n d i n co n s iste nc ie s i n t h e va l u e o f
co i n s .

3 . M i nti ng a n d P ro d u c ti o n C o sts : M i nt i ng a n d p ro d uc ing m eta l l i c co i n s i nvo l ve d s u bstanti al co st s re l ate d to

m i n i n g , ref i n i n g , m i nt i n g , d i st ri but ion, a n d re p l a ce m e nt d u e to wea r a n d tea r.

4 . L i m i ted S u p p ly : T h e s u p p ly o f p re c i o us m eta l s l i ke go l d a n d s i l ve r wa s l i m i te d a n d co u l d n't ke e p u p wi t h t h e

g ro wing n e e d s o f ex p a n di ng e co n o m i e s.

5. In h e rent Va l ue :The va l u e o f m eta l l i c co i n s wa s b a s e d o n t h e i nt r ins i c va l u e o f t h e m eta l i t s el f, wh i c h co u l d

f l u c t uate d u e to ex te r n al fa c tors l i ke s u p p ly, d e m a nd , a n d ge o p ol iti cal eve nt s .
Representative Money

To a d d r e s s th e i n co nven ien ce o f ca r r y in g m e ta l co i n s , r e p r e s en ta tive m o n e y e m e r g e d. Th is

f o r m o f m o n e y wa s b a cke d b y a co m m o d ity, u s u ally g o l d o r s i l ver, h eld i n r e s e r ve. Pe o p l e co uld
e xch a n g e th e r e p r e s e ntative m o n e y f o r a s p e ci f ic a m o u n t o f th e co m m o d ity it r e p r e s e nted
( e . g ., a g ol d ce r ti f icate r e p r e s e n ting a ce r ta in a m o unt of g old ) .

Fi a t m o n e y, u n l i ke co m m o d ity - b acke d cu r r e n ci es , h a s n o i n tr in s ic va l u e a n d i s n o t b a cke d b y a

p hy s i cal co mm odity. Its va l u e is b a s e d o n th e tr u s t a n d co n f i d en ce p e o p l e h ave in th e i s s u i ng
g ove r n me nt o r a u th o r ity. G ove r nm en ts d e cl a r ed f i a t m o n e y a s l e g al ten d er, m e a n i ng i t m u s t b e
a cce p te d a s a m e d i um o f e xch a n g e w i th i n th e co u n tr y.

E ve n tu ally, b i l ls o f e xch a n g e b e ca m e a co m m o n p a r t o f th e w o r l d e co n o my. A b i l l o f e xch a n g e

i s e s s e n tia lly a w r i tte n o r d e r th a t o n e p e r s o n o r g r o u p w i l l p ay a s p e ci f ie d a mo un t o f m o n e y o n
d e m a n d . A b i l l o f e xch a n g e ca n b e u s e d to s e ttle a n a cco u n t i n i n te rn atio na l tra d e , w h i ch wa s
one of the e a r l y use s o f th i s o r d e r.
The Introduction of Banks

Th e f i r s t b a nks w e r e s ta r te d b y th e Ro m a n E m p i r e a r o u n d 1 8 0 0 B. C . Th e s e b a n k s o f f e r ed l o a n s
a n d a cce p te d d e po sits f r o m i n d ivid ua ls , b u t w o u l d l a te r d i s a p p ear w i th th e co l l a ps e o f th e
e m p i r e. B y th e tu r n o f th e 1 9 th ce n tu r y, b a n k s h a d b e co m e r e s p e ctab le o r g a n iz a tion s w i th in
com m unities a nd l e a r n e d th e co n ce p t o f f ra cti on al r e se r ve b a nk ing . Si nce i nd ivid uals d i d n’ t a l l
w i th d raw a ll th eir m on ey a t o n ce , b a n k s l e a r ne d th at the y co u l d l o a n m o r e m o n e y th a n th e y
a ctu a lly h a d , w h i ch wa s a h u g e s te p i n th e h i s to r y o f m o n e y.
The Gold Standard

I n 1 8 1 6 , g o l d wa s m a d e th e s ta n d a r d o f va l u e i n th e co u n tr y o f E n g l a nd . W h a t th i s m e a n s i s
th a t e a ch b a n k n ote r e p r e s e n te d a ce r ta in a m o u n t o f g o l d , s o o n l y a l i m ited n u m b e r o f
b a n k n o te s ca n b e p r i n ted . Th i s g ave p r e v io us ly u n ba cked cu r r e n cy s o m e s e m b l an ce o f va l u e
a nd sta b i lity. B y 1 9 0 0 , th e U n i ted Sta te s h a d f o l lo w ed suit w ith the G ol d Sta nd a rd A ct. Whi le
th i s w o u l d l e a d to th e U. S. e s ta b lis hin g th e ce n tra l b a nk th at p lay s a n i m p o r tan t r ole i n th e
e co n o my tod ay, th e G o l d Sta n d a r d e n ded i n th e 1 9 3 0 s d u e to th e D e p r e s s io n a n d th e
d e va lu atio n o f g o l d .

11
Rise of Modern Banking

Ba n k o f Sw e d en ( 1 668): Th e Sve r i ge s Ri k s b a nk , e s t a b lis h ed i n Sw e d e n , i s o n e o f t h e e a r l ies t

ce n tra l b a nks i n th e w o r l d , p l ay in g a ke y r o l e i n i s s u i n g b a n k n o tes a n d ove r s e ein g th e
m o n e tar y s y s te m .

Ba n k o f E n g l a n d ( 1 6 94): Th e B a n k o f E n g l a n d, e s ta blis he d to ra is e f u n d s f o r th e g ove r n m ent,

b e ca m e a p r o m i nen t ce n tral b a n k a n d p l aye d a p i vo ta l r o l e i n s h a p i n g m o d e r n b a n k i n g
p ra cti ces .

In du s tri a l Re vo l u ti on ( 1 8 t h -19 th ce n t u r i es): Th e Ind ustr ial Re vol ution sp urr ed e conom ic
g r o w th a n d i n cr e a s ed th e d e m a n d f or b a n k i ng s e r v i ces to f a ci litate tra d e , i nve s tm en t, a n d
e co n o m ic e xp a n s i o n.
Transition to Paper Currency

P ra c t i c a l i t y a n d C o n ve n i en c e: Pa p e r c u r r e nc y wa s i n t r o du ce d t o a d d r e s s t h e p ra c t i c a l ity i s s u e s
a s s o c i a te d w i t h m e t a l c o i n s . C a r r yin g a n d h a n d l i ng l a r g e a m o u n t s o f m e t a l b e c a me c u m b e r s o me a n d
r i s k y.

Tr u s t i n I n s t i t u t i o n s : G ove r n m e nt s a n d c e n t ra l b a n k s b e g a n i s s u i ng p a p e r c u r r e n c y, i n i ti a l ly
r e p r e se nti ng a s p e c i f i c a m o u n t o f g o l d o r s i l ve r h e l d i n r e s e r ve s . Pe o p l e t r u s t e d t h e i s s u i n g a u t h o r i ty
t o h o n o r t h e va l u e o f t h e p a p e r n o t e s i n t e r m s o f t h e p r e c i o us m e t a l s t h e y c o u l d e x c h a ng e t h e m f o r.

E c o n o m i c F l e x i b i l i t y: O ve r t i m e , t h e d i r e c t l i n k b e t w e e n p a p e r m o n e y a n d g o l d o r o t h e r
c o m m o d i ti e s wa s g ra d u a l ly s e ve r e d. G ove r n m e nt s r e a l i ze d t h a t a p u r e f i a t c u r r e nc y s y s t e m a l l o w e d
f o r g r e a te r f l e x i bi l i ty i n m o n e t a r y p o l i c y, e s p e c i a l ly d u r i n g e c o n o m i c f l u c t ua ti o n s .

C o n t r o l le d M o n e y S u p p l y: W i t h a f i a t s y s t e m , c e n t ra l b a n k s c a n c o n t r o l t h e m o n e y s u p p l y b y
a d j u s t i ng i n t e re st ra t e s , b u y i ng o r s e l l i n g g ove r n me n t s e c u r i ti e s, a n d i n f l ue nc i ng l e n d i ng. T h i s
c o n t r o l h e l p s s t a b i l ize t h e e c o n o my a n d m a n a g e i n f l a ti o n .
History of Paper currency in India

1 . Ea r l y U s a ge ( 1 8 t h C e n t u r y) : T h e u s e o f p a p e r c u r re n c y i n I n d i a ca n b e t ra c e d b a c k to t h e 1 8 t h c e nt u r y d u r i n g t h e
B r i t i s h co l o n i a l e ra . E u ro p e a n t ra d i n g co m p a n i e s , p a r t i c u l a r l y t h e B r i t i s h Ea s t I n d i a C o m p a ny, n e e d e d a s ta n d a rd i ze d
m e d i u m o f exc h a n g e fo r t h e i r t ra n s a c t i o n s , a s t h e t ra d i t i o n a l b a r te r a n d m eta l l i c c u r re n c y sy s te ms w e re i n a d e q u a te
fo r t h e i r g ro w i n g t ra d e a c t i v i t i e s .

2 . B a n k o f H i n d o sta n ( 1 7 7 0 ) : T h e B a n k o f H i n d o s ta n , e s ta b l i s h ed i n 1 7 7 0 i n C a l c u tta ( Ko l ka ta ) , w a s o n e o f t h e e a r l i e st
b a n ks i n I n d i a to i s s u e p a p e r c u r re n c y. I t p l ay e d a c r u c i a l ro l e i n t h e e a r l y a d o p t i o n o f p a p e r m o n ey.

3 . B a n k o f B e n ga l , B a n k o f B o m b ay, a n d B a n k o f M a d ra s ( Ea r l y 1 9 t h C e n t u r y ) : I n t h e e a r l y 1 9 t h c e nt u r y, t h e B r i t i s h
Ea s t I n d i a C o m p a ny e s ta b l i s h e d t h re e p re s i d e n c y b a n ks : B a n k o f B e n ga l ( 1 8 0 6 ) , B a n k o f B o m b ay ( 1 8 4 0 ) , a n d B a n k o f
M a d ra s ( 1 8 4 3 ) . T h e s e b a n ks i s s u e d t h e i r o w n c u r re n c y n o te s , p ro v i d i n g a m o re s ta n d a rd i zed fo r m o f p a p e r m o n ey.

4 . Pa p e r C u r re n c y A c t ( 1 8 6 1 ) : T h e Pa p e r C u r re n c y A c t o f 1 8 6 1 w a s e n a c te d , g ra nt i n g t h e B r i t i s h I n d i a n g o v e r n me nt
t h e m o n o p o l y to i s s u e p a p e r c u r re n c y i n B r i t i s h I n d i a . T h e g o v e r n m ent b e ga n to i s s u e s ta n d a rd i ze d r u p e e n o te s t h at
w e re i n i t i a l l y b a s e d o n t h e ' g o l d s ta n d a rd , ' w i t h t h e r u p e e l i n ke d to a s p e c i f i c a m o u nt o f g o l d .
History of Paper currency in India

1 . Re s e r ve B a n k o f In d ia ( 1935) : T h e Re s e r ve B a n k o f I n d ia ( R B I) wa s e sta b l is he d i n 1935 a s t h e c e nt ral b a n k i ng

i n st i tuti on i n I n d i a. T h e R B I to o k ove r t h e re s p o ns i bil i ty o f i s s u i ng a n d m a n agi ng p a p e r c u r re n cy, sta ndardi zi ng
t h e d e s i g n a n d i s s u a nc e o f b a n k note s.

2 . Po st - In d ependen ce ( 1947 o nwa rd s) : Af te r ga i ni ng i n d e p e n de nce i n 1947, I n d i a co nt i nue d to u s e t h e I n d i an

r u p e e ( I N R) a s i t s o ff i c i a l c u r re n cy. T h e R B I b e ca m e t h e c e nt ral a u t h ori ty re s p o n si bl e fo r i s s u i ng , re g u l atin g ,
a n d m a n agi ng t h e I n d i an r u p e e .

3. D e ci malization ( 1957) : I n 1957, I n d i a a d o pte d a d e c i m a l c u r ren cy system, rep l a c ing t h e ea r l i er r u p ee a n n a

p a i s a syste m wi t h a d e c i m al syste m b a s e d o n m u l t i ple s o f te n .

4 . Intro d u c ti o n o f New D e s i g ns a n d D e n o m inatio ns :Ove r t h e ye a rs , t h e R B I h a s i nt roduc e d n ew d e s i g ns a n d

d e n o m i nat ions o f b a n k note s to i n co r porate e n h a nc e d s e c u r i ty fe at u re s, d e p i c t I n d ia's d i ve rs e c u l t ure , h e r i ta ge ,
a n d n o tab le p e rs o nali ti e s.
Printing of Currency Notes

C u r r en cy N o t e s P r es s ( N a s i k Ro a d ) : S i n ce 1 9 91 t h i s p r e s s p r i n t s cu r r en cy n o t e s o f
1 ,2 ,5 ,10,50 a n d 1 0 0

Ba n k N o t e s P r ess ( D e wa s ): C u r r en cy N o t e s o f 2 0 ,50,100 a n d 5 0 0 a r e p r i n t ed h e r e

U n d e r S e ct i o n 2 2 o f t h e Re ser ve Ba n k o f In d i a Act , R BI i s s u e s cu r r en cy n o t e s .

In d i a n C u r r e n cy N o t e s h ave 1 7 l a n g u a g e s p r i n t ed o n t h e m .

T h e f r o n t s i de o f th e b a n k n o t e co n t a i n s o n l y t w o l a n gu a ge s ( E n gl i s h a n d H i n di ) .

In b a ck s i d e , t h e re i s a l a n g u a g e p a n e l o n l e f t s i d e o f t h e b a n k n o t e s. T h e re a r e 1 5
s ch e d u l ed In d i a n l a n g u a g e s w r i t ten i n s i d e t h e p a n e l e xcl u d i n g H i n d i a n d E n g l i s h .
Currency Notes (Bank Notes)

T h e n u m b e r o f l a n g u a g e s o n t h e l a n g u a g e p a n e l o f a c u r r e nc y n o t e i s 1 5

T h e f r o n t s i d e o f t h e b a n k n o t e c o n t a i n s o n l y t w o l a n g u a g e s . T h e d e n o m i n a t i o n i s w r i t t en i n
both official languages English and Hindi.

I n b a c k s i d e , t h e r e i s a l a n g u a g e p a n e l o n l e f t s i d e o f t h e b a n kn o t es . T h e r e a r e 1 5 s c h e d u l ed
I n d i a n l a n g u a g e s w r i t t en i n s i d e t h e p a n e l e x c l u d i n g H i n d i a n d E n g l i sh .

O u t o f 2 2 l a n g u a g e s h a ve b e e n a c c o r d e d o f f i c i a l l a n g u a g e s t a t u s a s p e r t h e e i g h t h s c h e d u l e o f
t h e c o n s t i t u t i o n o f I n d i a , g e t s p l a c e s o n l y 1 6 l a n g u a g e s i n t h e I n d i a n c u r r e ncy n o t e s .

T h e a n o t h e r o n e l a n g u a g e i s a d d i t i o n a l o f f i c i a l l a n g u a g e E n g l i s h . To t a l l y 1 7 .

H o w e ve r, t h e 6 s c h e d u l ed l a n g u a g e s a r e m i s s i n g i n I n d i a n C u r r e n c y n o t e s .

A s p e r R B I A c t , 1 9 3 4 C u r r e n c y N o t e s c a n b e i s s u e d u p t o t h e d e n o m i na t i o n o f R s . 1 0 , 0 0 0 .
 Money supply

Money supply refers to the amount of money which is in circulation in an economy at any given time. It is the total
stock of money held by the people consisting of individuals, firms, State and its constituent bodies except the State
treasury, Central Bank and Commercial Banks.

Simply money supply is stock of money in circulation.

There are different forms of money supply – reserve money, narrow money, broad money etc. But the most
important indicator of all these is reserve money. It is also called as high powered money, base money and central
bank money

RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.
The Net Demand and Time Liabilities or NDTL

The Net Demand and Time Bank’s NDTL = Demand and time
Liabilities or NDTL shows the liabilities (deposits) – deposits with
In other words, the net demand and other banks
difference between the sum of demand
time liabilities of a bank can be
and time liabilities (deposits) of a bank
calculated by using the following
(with the public or the other bank) and
formula:
the deposits in the form of assets held
by the other bank.
Concepts of money supply

M2 = M1 + Savings
M1 = CU + DD deposits with Post
Office savings banks

M4 = M3 + Total
deposits with Post
M3 = M1 + Net
Office savings
time deposits of
organizations
commercial banks
(excluding National
Savings Certificates
 Concepts of money supply

M1 and M2 are known as narrow money.

M3 and M4 are known as broad money.

These measures are in decreasing order of liquidity.

M1 is most liquid and easiest for transactions whereas M4 is least liquid of all.

M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources
High powered money

H i g h p o w e red m o n e y o r p o w e r f ul m o n e y o r m o n e t a r y b a s e r e fers t o t h a t cu r r e n cy t h a t
h a s b e e n i s s u e d b y t h e G ove rn men t a n d Re s er ve Ba n k o f In d i a .

S o m e p o r t i o n o f t h i s cu r r en cy i s ke p t a l o n g w i t h t h e p u b l i c w h i l e r e st i s ke p t a s f u n d s i n
Re ser ve Ba n k .

H = C + R

Wh e r e H = H i g h Po w ered Mo n e y

C = C u r r en cy w i t h t h e p u b l i c ( Pa p er m o n e y + co i n s d e p o s i t s)

R = G ove rn m en t a n d b a n k d e p o s i t s w i t h R BI
Money supply
Monetary base
Currency in Circulation

C u r r en cy i n ci r cu l a t i o n co m p r i s es cu r r e n cy w i t h t h e p u b l i c a n d ca s h i n h a n d w i t h b a n k s .
I t i n cl u d e s n o t e s i n c i r cu l a t i o n , r u p e e co i n s a n d s m a l l co i n s .

T h e r u p e e co i n i s a t o ke n co i n m a d e o f n i cke l a n d i t s f a ce va l u e i s h i g h e r t h a n i t s
m e t a l l i c va l u e .

G ov t i s s u e s a l l co i n s u p t o R s . 1 0 0 0.

Al l t h e p a p e r cu r r en cy o f In d i a e xce p t o n e r u p e e n o t e b e a r s t h e s i g n a t u r e o f R BI
G ove rn o r a s t h e s e a r e i s s u e d b y R BI , b u t t h e o n e r u p e e n o t e b e a r s t h e s i g n a t u r e o f t h e
F i n a n ce S e cr et ar y.

O n e Ru p e e N o t e d o e s n’ t co n t a i n “ I p r o m i s e t o p ay b e a rer
Currency in Circulation

T h e vo l u m e o f r u p ee co i n s a n d s m a l l co i n s a s w e l l a s o n e -ru p ee n o t e s i n co n t r o l l e d b y
R BI .

R BI ca n p r i n t a n d i s s u e cu r r en cy n o t e s o f d i f fe ren t d e n o m i n a t i o n s f r o m t w o r u p ee n o t e s
t o t e n t h o u s a n d r u p e e n o t e s.

T h e s y m b o l o f In d i a n Ru p e e ca m e i n t o u s e o n Ju l y 1 5 t h ,2010. In d i a i s t h e 5 t h e co n o my
( a f t er Am e ri ca , Br i t a i n , Ja p a n a n d E u r o p e) t o a cce p t a n e w cu r r en cy s y m b o l .

N e w cu r r e n cy s y m b o l wa s d e s i g n ed b y D U d aya Ku m a r. I t i s a n a m a l g a m a t i o n o f
D e va n gri ‘ Ra’ a n d t h e Ro m a n ‘ R’ w i t h o u t t h e s t e m .
 Demand and time liabilities

Other Demand and Time

Liabilities: These include all those
Time liabilities are those liabilities of a miscellaneous liabilities which are not
The demand liabilities include all those
bank which are payable otherwise on covered in above two types of liabilities.
liabilities of a bank which are payable on
demand. These include fixed deposits, Such as interest accrued on deposits,
demand. Such as current deposits, cash
cash certificates, staff security deposits, unpaid dividend, suspense account
certificates and cumulative/recurring
time liabilities portion of saving deposits balances showing the amount due to
deposits, etc., all are paid on demand.
account, gold deposits, etc. other banks or public, participation
certificates issued to other banks, cash
collaterals, etc.
Money multiplier
Balance sheet of banks
Monetary policy

Monetary policy, the demand side of economic policy, refers to the actions
undertaken by a nation's central bank to control money supply and achieve
macroeconomic goals that promote sustainable economic growth.

In the Indian context, monetary policy comprises those decisions of the government
and the Reserve Bank of India which directly influence the volume and composition
of money supply, the size and distribution of credit, the level and structure of
interest rates, and the effects of these monetary variables upon related factors such
as savings and investment and determination of output, income and price.
Instruments of monetary policy

Quantitative or General Measures Qualitative or Selective measures

The quantitative measures are directed towards Selective or qualitative instruments

influencing the total volume of credit in the of credit control, on the other hand, are directed
banking system without special regard for the towards the particular use of credit and not
use to which it is put. its total volume.
Instruments of monetary policy

Quantitative or General Measures Qualitative or Selective measures

Variable Reserve Requirements Margin Requirement

• CRR & SLR

Bank Rate Policy Credit Regulation

Open Market Operations Credit Rationing

Liquidity Adjustment Facility and Moral Suasion

Marginal Standing Facility

Direct Action
Monetary Policy Tools
Cash reserve ratio(CRR)

It is the share of net demand and time liabilities that banks must maintain as
cash balance with the Reserve Bank of India.

At present CRR is 4.5%

Changes in CRR often influence the availability of resources in the banking

system for lending to the private sector.

RBI do not pay any interest on it to the banks

Controlling inflation

Increase in CRR

Banks are required to maintaining a higher cash balance with the RBI

Bank’s ability to lend to market decreases

Liquidity in the market decreases

Lending rates will increase

Inflation contained
Statutory Liquidity ratio (SLR)

It is the share of net demand and time liabilities that banks must maintain in
safe and liquid assets, such as, government securities, cash and gold etc.

At present SLR is 18.00%

Changes in SLR often influence the availability of resources in the banking

system for lending to the private sector.
Controlling inflation

Increase in SLR.

Banks are required to maintaining a higher amount with themselves in safe and liquid assets

Bank’s ability to lend to market decreases

Lending rates will increase.

Liquidity in the market decreases

Inflation is contained
 Repo rate

It is the rate at which RBI provides short term loans to banks against the collateral of
government and other approved securities under the liquidity adjustment facility (LAF).

Repo rate is used by monetary authorities to control inflation.

At present repo rate is 6.5%.

How Does Repo Rate Work?

When you borrow money from the bank, the transaction attracts interest on the principal amount. This is referred to
as the cost of credit. Similarly, banks also borrow money from RBI during a cash crunch on which they are required
to pay interest to the Central Bank. This interest rate is called the repo rate.

Technically, repo stands for ‘Repurchasing Option’ or ‘Repurchase Agreement’. It is an agreement in which
banks provide eligible securities such as Treasury Bills to the RBI while availing overnight loans. An
agreement to repurchase them at a predetermined price will also be in place. Thus, the bank gets the cash
and the central bank the security.
Controlling inflation

Lending rates
Rise in Repo Results in
increase making
rate Flow of money Liquidity in the declining
RBI increases borrowing a Inflation
disincentives in the economy market investment and
Repo Rate costly affair for Contained
banks to borrow decreases decreases. money supply
businesses and
from RBI in the market.
industries
Reverse Repo rate

It is the rate at which banks park their surplus funds with RBI for short term. RBI
provides collateral of government and other approved securities to banks which park
their surplus fund with RBI.

It is the rate at which RBI borrows money from banks

At present the Reverse Repo rate is 3.35%

 Controlling Inflation

It thus reduces the

liquidity in the market and
RBI increases Reverse increases the interest rate
Repo rate on borrowing. Inflation Contained

It makes it attractive for Private players will find it

the bank to park funds costly to borrow and thus
with the RBI(More investment decreases.
certainty of return + more
interest rate) rather than
to lend to the private
sector.
 Marginal Standing facility (MSF)

It is the rate at which Banks can borrow short term funds from RBI.

The MSF was launched by RBI while reforming the monetary policy in 2011-12.

It is penal rate at which banks can borrow money from the central bank over and above what is
available to them through the Liquidity Adjustment Facility window.

Under MSF, banks can borrow funds from the RBI by pledging government securities within the limits
of the SLR.

Current Rate: 6.75%

REPO RATE VS MSF

Repo Rate MSF

It is the rate at which the money is lent It is a rate at which RBI lends money
by RBI to commercial bank only to scheduled banks.
It is applicable to loans provided to It is meant for lending overnight to
banks, who are applying to meet short- banks.
term financial needs.

Lending money at repo rates is done in Loans given at MSF rates involve
lieu of selling bank’s securities as providing government securities as
collateral to RBI along with the collateral.
agreement of repurchase.

Banks are not allowed to use the Under MSF, banks are also allowed to
securities that come under SLR in the use the securities that come under SLR
process of availing loans from RBI. in the process of availing loans from
RBI.
Bank Rate

It is the rate at which banks borrow long term loans from

RBI.

At present, it is not used by RBI for monetary management.

It is now same as the (Marginal Standing Facility) MSF rate.

 Open Market Operations(OMO)

It refers to conduct of market

operations by RBI by way of
sale/purchase of government
It is purchase/sale of govt securities
securities to/from the market with
by RBI.
an objective to adjust the rupee
liquidity conditions in the market on
a durable basis.
Controlling Inflation

Banks Lending
borrow This reduces rates
RBI sucks
Government the excess increases This
RBI Sells out excess Inflation
securities liquidity in and prevents
Securities liquidity in Contained
and provide the borrowing investments
the market
money to economy. becomes
the RBI. costly
 Open Market Operations

Open market operations is the sale and purchase of government securities and treasury bills by RBI or the central
bank of the country.

The objective of OMO is to regulate the money supply in the economy.

When the RBI wants to increase the money supply in the economy, it purchases the government securities from the
market and it sells government securities to suck out liquidity from the system.

OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on
the interest rate and inflation rate levels.
Current Rates

50
Market Stabilisation Scheme (MSS)

I t i s a m o n e t ar y p o l i cy i n t e r ven t i on b y t h e R BI t o w i t h d raw e xce ss l i q u i d i t y ( o r m o n e y

s u p p l y ) b y s e l l i n g g ove rn m ent s e cu r i t ies i n t h e e co n o my.

I t wa s i n t r o d u ce d i n t h e 2 0 0 4.

In t h e MSS, Li q u i d i t y o f a m o r e e n d u r i n g n a t u r e a r i s i n g f r o m l a r g e ca p i t a l f l o w s i s
a b s o r b ed t h r o u g h s a l e o f s h o r t -d ated g ove r n men t s e cu ri t i es a n d t r e as ur y b i l l s .

T h e m o b i l i s e d ca s h i s h e l d i n a s e p a ra te g ove r nm en t a cco u n t w i t h t h e Re ser ve Ba n k .

H o w MSS co n t r o l s In f l a t i o n ? S i m i l a r t o O MO
 Margin Requirement

Generally, commercial banks give loan against ‘stocks or ‘securities’. While giving loans
against stocks or securities they keep margin. Margin is the difference between the market
value of a security and its maximum loan value. Let us assume, a commercial bank grants a
loan of Rs. 8000 against a security worth Rs. 10,000. Here, margin is Rs. 2000 or 20%.

Thus to tackle inflation, RBI may prescribe higher margin requirements to make credit
availability difficult. Thus less loan disbursement and less private investment, less demand
and thus inflation reduces
 Moral Suasion

Moral suasion means persuasion and request. To arrest inflationary situation Central Bank persuades and requests the
commercial banks to refrain from giving loans for speculative and non-essential purposes. On the other hand, to
counter defiation Central Bank persuades the commercial banks to extend credit for different purposes.

For example – RBI may nudge banks to lower their lending rates when the Repo rate is lowered

In case of High Inflation, RBI may nudge banks to increase their lending rates and follow dear money policy
Rationing of credit

Rationing of credit is a method by which the Reserve Bank seeks to

limit the maximum amount of loans and advances, and also in
certain cases fix ceiling for specific categories of loans and advances.

RBI also makes credit flow to certain priority or weaker sectors by

charging concessional rates of interest. This is at times also referred
to as Priority Sector Lending.
Priority Sector Lending (PSL)

It means those sectors which the Government of India and

Reserve Bank of India consider as important for the development
of the basic needs of the country and are to be given priority over
other sectors. The banks are mandated to encourage the growth
of such sectors with adequate and timely credit.
 Targets

40% of the total net bank credit should go to a priority sector advances.
• 10% of the priority sector advances or 10% of the total net bank credit, whichever is
higher should go to weaker section.
• 18% of the total net bank credit should go to agricultural advances. Within the 18
percent target for agriculture, a target of 8 per cent of Adjusted Net Bank Credit (ANBC)
or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher is
prescribed for Small and Marginal Farmers, to be achieved in a phased manner.
• 5 of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is
higher should go to Micro enterprises.
Priority Sector Lending Certificates (PSLCs)

Priority Sector Lending Certificates (PSLCs) are PSL certificates allow banks sitting on surplus
instruments that enable banks to achieve their loans to a priority sector to sell certificates to
priority sector lending targets without actually banks that haven’t met their targets, pocketing
disbursing loans to sectors outside their a sizeable fee for this trade. The said loans
comfort zone. however do not change hands.
Evolution of PSL
 Monetary policy

The RBI is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under
the Reserve Bank of India Act, 1934.

Now there is a flexible inflation targeting framework in India (after the 2016 amendment to the Reserve Bank of India
(RBI) Act, 1934).

The amended RBI Act provides for the inflation target to be set by the Government of India, in consultation with the
Reserve Bank, once every five years.

Current Inflation Target: The Central Government has notified 4 per cent Consumer Price Index (CPI) inflation as the
target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 per cent and the
lower tolerance limit of 2 per cent.
Monetary Policy

Expansionary Monetary Policy: It increases the supply of money in an economy

by making credit supply easily available. Money produced through such a policy is
called as cheap money. An expansionary monetary policy is required when an
economy goes through a phase of recession accompanied by lower levels of
growth/high levels of unemployment. But risk associated with EMP is inflation.

Contractionary Monetary Policy: It decreases the supply of money in the

economy. Contractionary monetary is used to tackle the menace of inflation in the
economy by raising the interest rates.
Direct action

This method is adopted when a commercial bank does not co-operate with the
central bank in achieving its desirable objectives. Direct action may be as:

Central banks may charge a penal rate of interest over and above the bank rate
upon the defaulting banks;

Central bank may refuse to rediscount the bills of those banks which are not
following its directives;

Central bank may refuse to grant further accommodation to those banks whose
borrowings are in excess of their capital and reserves.
History of banking in India

The story of banks in India starts with

establishment of Bank of Hindustan in 1770 by
the agency house of Alexander and Company.
Bank of Hindustan failed in the commercial crisis
of 1832.

The General Bank of India was established in

• 1. Bank of Calcutta (in 1806 & later
1786 but failed in 1791. Three Presidency banks renamed as Bank of Bengal in 1809),
were set up under charter of the British East • 2. Bank of Bombay (in 1840) and,
India Company:
• 3. Bank of Madras (in 1843).

These three presidency banks were merged in

1921 to form the Imperial Bank of India, which
upon India's independence, became the State
Bank of India in 1955.
Banks established in Pre-independence period which are still in
existence

Canara Bank
Central Bank 1906
of India 1911
Bank of India
1906

Punjab
National
Bank 1894
Allahabad
Bank
1865
The Reserve Bank of India

The Reserve Bank of India was established

on April 1, 1935 in accordance with the
In 1949, the Banking Regulation Act was
provisions of the Reserve Bank of India
enacted, which empowered the Reserve
Act, 1934 with a paid-up capital of 5 Crore
Bank of India (RBI) to regulate, control,
and nationalized in 1949 on the
and inspect the banks in India.
recommendation of Hilton Young
Commission.
 Nationalisation of Banks

The government
through the
Banking Companies
“Nationalization is The Reserve Bank
(Acquisition and
the process of of India was All shares in the
Transfer of
transforming private nationalized with capital of the Bank
Undertakings)
assets into public effect from 1st were deemed
Ordinance, 1969 In 1980, six more
assets by bringing January, 1949 on transferred to the
and nationalized the banks were
them under the the basis of the Central Government
14 largest nationalized.
public ownership of Reserve Bank of on payment of a
commercial banks
a national India (Transfer to suitable
on 19 July 1969.
government or Public Ownership) compensation.
These lenders held
state.” Act, 1948.
over 80 per cent
bank deposits in the
country.
Liberalisation in the 1990s

Liberalization refers to a relaxation of

It allowed the entry of private sector
previous government restrictions,
players into the banking system. This
usually in areas of social or economic
move, along with the rapid growth in
policy. Liberalization in Indian banking
the economy of India, revitalized the
sector was begun since 1992, following
banking sector in India.
the Narsimham Committee Report.
Types of banks

Banks in India

Scheduled Non-Scheduled
Banks Banks

Commercial Co-operative
Banks Banks

Public Sector
Private Banks Foreign Banks RRBs UCBs RCBs MSCBs
Banks
14-10-2023 68
Co-operative banks

A Co-operative bank is a financial entity which belongs to its members, who are at the same time the
owners and the customers of their bank. It is distinct from commercial banks.

They are broadly classified into Urban and Rural co-operative banks based on their region of
operation.

They are registered under the Co-operative Societies Act of the State concerned or under
the Multi-State Co-operative Societies Act, 2002.

They come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the
Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.
 Ordinance to regulate urban and multi -state cooperative banks

In 2020, the Central government approved an Ordinance to bring all urban and multi-state
cooperative banks under the direct supervision of the Reserve Bank of India (RBI).

Currently, these banks come under dual regulation of the RBI and the Registrar of Co-
operative Societies, resulting in regulatory and supervisory lapses at many of these banks.
•The role of registrar of cooperative societies includes incorporation, registration, management, audit,
supersession of board and liquidation.
•RBI is responsible for regulatory functions such maintaining cash reserve and capital adequacy, among others.

The rural co-operative banks will continue to remain under the dual regulation of RBI
and Registrar of Co-operative Societies.
 Regional Rural Banks (RRBs)

Regional Rural Banks (RRBs) were set up as a regional based rural lending institutions under the Regional Rural Banks
Act, 1976.

They were established based on the recommendations of Narsimham Committee working group.

The first Regional Rural Bank “Prathama Grameen Bank” was set up on 2nd October, 1975.

As per guidelines of Reserve Bank of India (RBI), the RRBs have to provide 75 per cent of their total credit under
Priority Sector Lending(PSL).

RRBs are primarily catering to the credit and banking requirements of agriculture sector and rural areas.

RRBs also provide lending to micro/small enterprises and small entrepreneurs in rural areas.

Regional Rural Banks are regulated by RBI and supervised by National Bank for Agriculture and Rural Development
(NABARD) .

The RRBs were established by three entities with their respective shares as follows:

Central Government → 50%

State government → 15%

Sponsor bank → 35%
Non-Banking Financial Company (NBFC)

A Non-Banking Financial Company (NBFC) is a company registered under

the Companies Act, 1956 engaged in the business of loans and advances,
acquisition of shares/stocks/bonds/debentures/securities, etc.

A non-banking institution which is a company and has principal business of

receiving deposits under any scheme or arrangement in one lump sum or
in installments by way of contributions or in any other manner, is also a
non-banking financial company (Residuary non-banking company).
What is difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities

are akin to that of banks; however there are a few
differences as given below:
• i. NBFC cannot accept demand deposits;
• ii. NBFCs do not form part of the payment and settlement system and
cannot issue cheques drawn on itself;
• iii. deposit insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in case of banks
 What is DICGC?

Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of

the Reserve Bank of India (RBI).

It provides deposit insurance that works as a protection cover for bank deposit holders when
the bank fails to pay its depositors.

The agency insures all kinds of deposit accounts of a bank, such as savings, current,
recurring, and fixed deposits up to a limit of Rs. 5 lakh per account holder per bank.

In case an individual's deposit amount exceeds Rs.5 lakh in a single bank, only Rs.5 lakh,
including the principal and interest, will be paid by DICGC if the bank becomes bankrupt.
What DICGC Does Not Cover?

1 . D e p o s i t s o f s t a t e o r C e n t ral g ove rn men t s

2 . D e p o s i t s f r o m fo r e i g n g ove r nm en ts

3 . Sta te l a n d de vel o p men t b a n k s d e p o s i t i n g w i t h th e s ta te co -o pe rati ve ba n k

4 . In t er -b a n k d e p o s i t s

5 . F u n d s t h a t a r e d u e o n a cco u n t o f In d i a a n d d e p o s i t s r e cei ved o u t s i d e In d i a

6 . F u n d s e xe mp ted b y t h e co r p o ra t i o n w i t h t h e p r e v i o u s a p p r ova l f r o m R BI
NBFCs

N o n - b an king F i n a n cial c o m p a ny c a n c o m m e nce o r c a r r y o n b u s i ness o f a n o n - b an king fi n a n cial

i n s titu tion o n l y a ft e r o b t ain ing a c e r t ificate o f re gi stration fro m t h e R B I a n d h a v in g a N e t Ow n e d
F u n d s o f ₹ 25 l a k hs ( ₹ Tw o c rore s i n ce A p r i l 1999) .

H ow eve r t o a v oid t h e p ro b lem o f d u a l re gu l ation , c e r t ain c a t egor ies o f N B F C s w h i c h a re re gu l ate d

by o t h er re gu l ators a re exe m p t ed fro m t h e re q u i rem en t o f re gi stration w i t h R B I v i z. Ve n t u re C a p i t al
F u n d / Merch an t B a n k in g c o m p an ies/S tock b ro kin g c o m p anie s re gi s tered w i t h S E B I, I n s u ra nce
C o m p a n y h o ld ing a v a l id C e r t ificat e o f R e gi s tration i s s ue d by I R DA, N i d h i c o m p an ies a s n o t ified
u n d e r t h e C o mp a n ies A c t , 1956, C h i t c o mp a nies a s d e fi n e d i n t h e C h i t F u n d s A c t , 1982, Ho u s ing
F i n a nce C o m p a n ies re gu l ate d by N a t ional H o u s in g B a n k , S t o ck E xc h an ge o r a M u t u a l B e n e fit
c o m p an y.

H e n c e , t h e s e s e c toral re gu la tor s re gu l ate re s p ective e n t i ties a n d R B I d o e s n o t re gu la te a l l t h e

NB F C s .
 Powers of RBI over NBFCs

The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue
directions, inspect, regulate, supervise and exercise surveillance over NBFCs.

The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders
issued by RBI under the RBI Act.

The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or
prohibiting them from accepting deposits etc.

It is illegal for any financial entity to make a false claim of being regulated by the Reserve Bank to mislead the
public to collect deposits. They will be liable for penal action under the Indian Penal Code in such a scenario.

→NBFC which are accepting deposits have similar norms related to SLR, CRAR norms that are applicable to
banks
 NBFCs

There are two kinds of banking licences that are granted by the Reserve Bank of India -
universal bank licence and differentiated bank licence.

Payments bank comes under a differentiated bank licence since it cannot offer all the
services that a commercial bank offers. In particular, a payments bank cannot lend.

It can take deposits upto ₹1 lakh per account and it can issue debit cards but not credit
cards.

Commercial banks in India like State Bank of India or ICICI Bank, do not have any such
restrictions.
 Payment Banks

A payments bank (Airtel Payments Bank, India Post Payments Bank, etc.) is like any other bank, but operating on a
smaller or restricted scale.

Credit risk is not involved with the Payments Bank. It can carry out most banking operations but cannot advance loans
or issue credit cards.

It can accept demand deposits only i.e. savings and current accounts, not time deposits.

The Payment Banks cannot set up subsidiaries to undertake non-banking financial services activities.

A committee headed by Dr. Nachiket Mor recommended setting up of 'Payments Bank' to cater to the lower income
groups and small businesses.
 Scope of Activities

Acceptance of demand deposits, initially restricted to holding a maximum balance of Rs 100,000 per individual customer.

Issuance of ATM/debit cards.

They cannot issue credit cards.

They are not allowed to give loans.

Payments and remittance services through various channels.

Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.

They are only allowed to invest the money received from customers' deposits into government securities.

They cannot accept NRI deposits.

A payments bank account holder would be able to deposit and withdraw money through any ATM or other service providers.

Payments licensees would be granted to mobile firms, supermarket chains and others to cater to individuals and small businesses
Regulation of payments banks

T h e Pay m e n ts Ba n k w i l l b e r e g i s tered a s a p u b l i c l i m i t e d co m p a ny u n d e r t h e C o m p a n i e s
Act , 2 0 1 3. I t i s g ove r ned b y t h e p r ov i s i o n s o f t h e Ba n k i n g Re g u l a t i o n Act , 1 9 4 9; R BI Act ,
1 9 34; Fo r e i gn E xch a n g e Ma n a g e m en t Act , 1 9 9 9, Pay m e n t a n d S e t t l emen t Sy s t e ms Act ,
2 0 07, o th e r r e l eva n t S t a t u t e s a n d D i r e ct i ves.

T h e y n e e d t o m a i n t a i n a C a s h Re ser ve Ra t i o ( C R R ) .

Re q u i red t o i nve s t a m i n i m u m 7 5 % o f i t s " d e m a n d d e p o s i t b a l a n ce s " i n S t a t u t o r y

Li qu i di ty Ra ti o ( SLR ) e l i g i b l e G ove r n men t s e cu r i ti es /trea su r y bi l l s w i th ma tu r i ty u p to
o n e ye a r.

N e e d t o h o l d m a x i m u m 2 5 % i n cu r r e nt a n d t i m e / f i xed d e p o s i t s w i t h o t h e r s ch e d u l ed
co m m e r ci a l b a n k s fo r o p e ra t i on a l p u r p o s es a n d l i q u i d i t y m a n a g e men t
 Small Finance Bank

Small Finance Banks are the financial institutions which provide financial services to the
unserved and unbanked region of the country.

They are registered as a public limited company under the Companies Act, 2013.

SFBs will be given scheduled bank status once they commence their operations, and
found suitable as per Section 42 of the Reserve Bank of India Act, 1934.
Regulation

S m a l l F i n a n c e B a n ks a r e g o ve r n ed b y t h e p r o v i s i o n s o f t h e :

B a n ki n g Re g u l a t i o n A c t , 1 9 4 9 ;

Re s e r ve B a n k o f I n d i a A c t , 1 9 3 4 ;

Fo r e i g n E x c h a n g e M a n a g e m e n t A c t , 1 9 9 9 ;

Pa y m e n t a n d S e t t l em e nt Sy s t e m s A c t , 2 0 0 7 ;

C r e d i t I n fo r ma t i o n C o m p a n i e s ( Re g u l a t i o n ) A c t , 2 0 0 5 ;

D e p o s i t I n s u ra n c e a n d C r e d i t G u a ra n t e e C o r p o ra t i o n A c t , 1 9 6 1 ;

O t h e r r e l e va n t S t a t u t es a n d t h e D i r e c t i ve s , P r u d e nt i a l Re g u l a t i o n s a n d o t h e r
G u i d e l i ne s / In s t r u c t i o n s i s s u e d b y Re s e r ve B a n k o f I n d i a ( R B I ) a n d o t h e r r e g u l a t o r s f r o m t i m e
to time.
Some of the operational Small Finance Banks in India are as
follows

U j j i va n S m a l l F i n a n ce Ba n k .

Ja n a l a k s h m i S m a l l F i n a n ce Ba n k .

E qu i ta s Sma l l F i n a n ce Ba n k .

A U S m a l l F i n a n ce Ba n k .

C a p i t a l S m a l l F i n a n ce Ba n k .

E S A F S m a l l F i n a n ce Ba n k .

U t k a r sh S m a l l F i n a n ce Ba n k .

S u r yo d ay S m a l l F i n a n ce Ba n k .

F i n ca r e S m a l l F i n a n ce Ba n k .
 SFBs

SFBs need to maintain a Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).

They are required to extend 75% of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification
as priority sector lending by the Reserve Bank of India.

At least 50% of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

SFBs can also transit to a universal bank, subject to fulfilling minimum paid-up capital/net worth requirements
as applicable to universal banks.

They cannot be a Business Correspondent (BC) for another bank. However, they can have their own BC
network.
14-10-2023 88
National Bank for Agriculture and Rural Development
(NABARD)

N A B A R D i s a n a p e x d e ve l o p m e n t f i n a n c i a l i n s t i t u t i o n i n I n d i a , h e a d q u a r t er e d a t M u m b a i w i t h
r e g i o n a l o f f i c es a l l o ve r I n d i a .

I t i s I n d i a’s s p e c i a l i ze d b a n k i n p r o v i d i ng c r e d i t f o r A g r i c u l t u r e a n d R u ra l D e ve l o p m e nt i n
India.

T h e B a n k h a s b e e n e n t r u s t e d w i t h “ m a t t e r s c o n c e r n i n g p o l i c y, p l a n n i n g a n d o p e ra t i o n s i n t h e
f i e l d o f c r e d i t f o r a g r i c u l t u r e a n d o t h e r e c o n o m i c a c t i vi t i es i n r u ra l a r e a s i n I n d i a”.

I t w a s e s t a b l i s h ed o n t h e r e c o m men d a t i o n s o f B . S i va ra m a n C o m m i t t e e o n 1 2 J u l y 1 9 8 2 t o
i m p l e m e nt t h e N A B A R D A c t 1 9 8 1 .

N A B A R D s u p e r vi se s S t a t e C o o p e ra t i ve B a n ks ( S t C B s ) , D i s t r i c t C o o p e ra t i ve C e n t ra l B a n k s
( D C C B s ) , a n d Re g i o n a l R u ra l B a n ks ( R R B s ) a n d c o n d u c t s s t a t u t o r y i n s p e c t i o n s o f t h e s e b a n k s .
National Housing Bank

•N H B i s a n Al l I n d ia Fi n a n ci al I n sti tuti on ( AI Fl ), s et u p i n 1988, u n d e r t h e N at i onal H o u s i ng B a n k Ac t , 1987.

•T h e N ati onal H o u s i ng Po l i cy, 1988 h a s e nvi s age d t h e s ett i n g u p o f N H B a s t h e Ap ex l eve l i n st i tuti on fo r

h o u s ing.

•I t i s a n a p ex a ge n c y e sta b li s he d to o p e rate a s a p r i n c ipal a ge n c y to p ro m ote h o u si ng f i n a nc e i n st it uti ons b o t h

at l o ca l a n d re g i o nal l eve l s .

•I t a i m s to p rovi d e f i n a nc i al a n d o t h e r s u p p ort i n c i d e ntal to s u c h i n st i tut ion s a n d fo r m atte rs co n n e c te d

t h e rewi t h.
EXIM Bank

•E X I M sta n ds fo r E x p o r t - Impor t

•E x p o r t - Im port B a n k o f I n d i a i s a w h o l l y- owne d G ov t . o f I n d ia e nt i t y

•E sta b li sh ed i n 1982

•Ai m : f i n a nc i ng , fa c i l i tati ng a n d p ro m oti ng fo re i g n t ra d e o f I n d i a.

•T h e E X I M b a n k ex te n d s L i n e o f C re d i t ( l o C ) to ove rs e a s f i n a n ci al i n st i tuti ons , re g i o nal d eve l o pm e nt b a n ks ,

s overei g n gover n ment s a n d o t h e r e nt i t ie s a b ro ad.

•T h u s t h e E X I M B a n ks e n a b l e s b u ye rs i n t h o s e co u ntri e s to i m p o r t d eve l o p me ntal a n d i nf ra struc ture ,

e q u i p m ent ’s , go o ds a n d s e r vi c e s f ro m I n d ia o n d efe r re d c re d i t te r m s .

•T h e b a n k a l s o fa c i l i tate s i nve st me nt by I n d ian co m p an ie s a b ro ad fo r s ett i n g u p j o i nt ve nt u re s, s u bs i di arie s o r

ove rs e a s a c q ui s iti ons .
Banks Board Bureau

•B a n ks B o a rd B u re a u i s a n a u ton omous b o d y o f U n i o n G ove r n m e nt o f I n d ia

I t i s ta s ke d to i m p rove t h e gove r nanc e o f P u b l i c Se c to r B a n ks , re co m m e n d t h e s e l e c t i o n o f c h i efs o f
gove r nm e nt - owne d b a n ks a n d f i n a n c ial i n st itu tio ns a n d to h e l p b a n ks i n d eve l o p i ng st rategi e s a n d ca p i tal
ra i s i ng p l a n s

•I t wi l l h ave t h re e ex - o ff i c i o m e m b e rs a n d t h re e ex p e r t m e m b e rs i n a d d it ion to C h a i rman

•Fi n a n ci al s e r vi c e s s e c reta r y, d e p u ty gove r nor o f t h e Re s e r ve B a n k o f I n d i a a n d s e c reta r y - p u b l i c e nte r pri se s

a re B B B ’s ex - o ff i c i o m em b e rs
Basel Accords

Ba s e l Acco r d s ( i .e . Ba s e l I , I I a n d n o w Ba s e l I I I )

P r escri b ed b y Ba n k fo r In t e rna t i o na l S e t t l e men ts ( BI S )

Ba s e l Acco r ds i s a Se t o f a g r e emen t s s e t b y t h e Ba s e l C o mmi ttee o n Ba n k Su pe r v i si o n

( BC BS ) , w h i ch p r ov i d es r e co m men d at i o n s o n b a n k i n g r e g u l a ti o n s i n r e g ard s t o ca p i t a l
r i s k , m a r ket r i s k a n d o p e ra ti o n a l r i s k

BI S wa s e s t a b l i s hed i n 1 9 3 0 a n d i t i s t h e w o r l d ’s o l d e s t i n t e r n at i o n al f i n a n ci a l
o r g a n i s a t i on .

Pu r p o se ➔ To e n s u re t h a t f i n a n ci a l i n s t i t u t i o n s h ave e n o u g h ca p i t a l o n a cco u n t t o m e et
o b l i g a t i o n s a n d a b s o r b u n e x p ected l o s s e s
Basel I

F i r s t Ba s e l Acco r d , k n o w n a s Ba s e l I , wa s i s s u e d i n 1 9 88

Fo cu s e d o n l y o n C R E DI T R I S K

C a te go ri ses th e a s s e t s o f f i n a n ci a l i n s t i t u t i o n i n to f i ve r i s k ca te go ri es ( 0 pe r ce n t, 1 0 per
ce n t , 2 0 p e r ce n t , 5 0 p e r ce n t , 1 0 0 p e r ce n t )

Ba n k s t h a t o p e ra te i n t e rn a ti o n a l l y a r e r e q u i red t o h ave a r i s k w e i g h t o f 8 % o r l e s s

In di a a do pted Ba s e l I n o r ms i n 1 9 9 9

R BI i s s u e d g u i d e l i n es t o m a i n t a i n a C R A R o r C A R o f 9 % b y e ver y S C B
 Capital to Risk Weighted Assets Ratio (CRAR)

Al s o k n o w n a s C a p i t a l Ad e q u a cy Ra t i o ( CA R)

I t i s a m e a s u re o f a b a n k ’s a b i l i t y t o a b s o r b l o s s e s

Fo r m u l a : va l u e o f i t s ca p i t a l d i v i d e d b y t h e va l u e o f r i s k -w ei gh ted a s s e ts

S i m p l y C A R = b a n k ’s ca p i t a l / b a n k ’s r i s k y a s s et s

A l o w ca p i t a l a d e q u a cy ra t i o ( C A R ) = b a n k h a s a l i m i t e d a b i l i t y t o a b s o r b l o s s es ( m e a n i n g
b a n k i s m o r e l i ke l y t o co l l a p s e i f p e o p l e s t a r t d e f a u l t i n g o n t h e i r l o a n s

High CAR= bank has good ability to absorb losses

capital adequacy ratio (CAR)

C A R = To t a l o f t h e T i e r 1 & T i e r 2 ca p i t a l s ÷ R i s k We i g h ted A s s e ts

Tier I Capital (Core Capital)

It i ncl ude s p ur e e q ui ty ca p i tal

E q u i ty m e a n s s h a r e th u s i t i n cl u de s Sh a r e C a p i tal ( Pa i d u p C a p i ta l)

I t a l s o i n cl u de s U n d i s trib u ted Pr o f its ( Re s e r ves )

I t i n cl u de s Pr e f e re nce s h a r e s

T i e r I I C a p i t a l ( S u p p l e men ta r y C a p i t a l )

M i xtu r e o f e q u i ty & D e b t C a p i ta E . g . - s u b o r d in ated d e b t

Basel Ii

Pu b l i s h e d b y BC BS i n 2 0 0 4

T h e s e co n d Ba s e l Acco r d , k n o w n a s Ba s e l I I , i s t o b e f u l l y i m p l e m en ted b y 2 0 15.

I t fo cu s e s o n 3 ma i n a r e as , i n cl u d i n g mi n i mu m ca pi ta l r e qu i remen ts, s u pe r vi so r y r e v i ew
a n d m a r ket d i s ci p l i n e , w h i ch a r e k n o w n a s t h e t h r e e p i l l a r s .

Mi n i m u m C a p i t a l r e q u i remen t o f 8 % o f r i s k a s s e ts

T h e fo cu s o f th i s a cco r d i s t o s t r e n gt h en i n t e rn a ti o n a l ba n k i n g r e qu i remen ts a s w e l l a s
t o s u p e r v i se a n d e n fo r ce t h e s e r e q u i remen t s

A s p e r R BI , a l l S C Bs w e re b o u n d t o co m p l y w i t h Ba s e l -II n o r m s
Basel III

Ba s e l I I I i s a n i n t e r n at i o n al l y a g r e ed s e t o f m e a s u res d e vel o ped b y t h e BC BS i n r e s p o n se

t o t h e f i n a n ci a l cr i s i s o f 2 0 0 7 -09.

O p e ra ti o n a l f r o m Ja n 1 , 2 0 13

Ai m : To s t r en g th en t h e r e g u l a t i o n , s u p e r v i si o n a n d r i s k m a n a g e m en t o f t h e b a n k i n g
s e ct o r.

Re q u i red t o m a i n t a i n T i e r I ca p i t a l ra t i o o f 4 .5 %

Ma i n t a i n ca p i t a l co n s e r va ti o n b u f fe r o f 2 .5 %

C o u n t e r cycl i ca l b u f fe r t o b e m a i n t a i n e d i n t h e ra n g e o f 0 % t o 2 .5 % t o p r e ven t e xce ss

cr e d i t g r o w t h i n t h e b a n k i n g s e ct o r

To t a l C R A R p r o p o s ed t o b e m a i n t a i n e d i n 9 .5 %
14-10-2023 99
100
101
Steps taken

In s o l venc y a n d B a n k ru ptc y C o d e ( IB C ) , 2016

Re ca p italizatio n o f P u b lic S e c to r B a n ks

A s s et Q u ality Rev i ew ( AQ R)

M e rge r o f P S B S

C re ati o n o f B a d B a n k

Fu tu re P l a n: P ri vatizatio n o f B a n ks

102
IBC

•A p p l i c at i o n - W h e n a c o r p o r a t e d e b t o r , o r a c o m p a n y w h i c h h a s t a k e n l o a n s , d e f a u l t s o n i t s l o a n
r e p a y me n t , e i t h e r t h e c r e d i t o r o r t h e d e b t o r c a n a p p l y f o r t h e i n i t i a t i o n o f a C o r p o r a t e I n s o l v e n c y
Resolution Process (CIRP) under Section 6 of the IBC.

•T h e m i n i m u m a m o u n t o f d e f a u l t a f t e r w h i c h t h e c r e d i t o r o r d e b t o r c o u l d a p p l y f o r i n s o l v e n cy i s R s .
1 crore.

•T h e I B C w a s a m e n d e d t o c o m p l e t e t h e r e s o l u t i o n p r o c e s s b y 3 3 0 d a y s f r o m t h e e a r l i e r 1 8 0 + 9 0 d a y s
deadline.

•A d j u d i c at i n g a u t h or i ty - T o a p p l y f o r i n s o l v e n c y , o n e h a s t o a p p r o a c h a s t i p u l a t ed a d j u d i c a t i n g
authority (various benches of National Company Law Tribunal (NCLT)).

•T h e T r i b u n a l h a s 1 4 d a y s t o a d m i t o r r e j e c t t h e a p p l i c a t i o n o r h a s t o p r o v i d e a r e a s o n i f t h e
admission is delayed.

•T h e a m e n d e d m a n d a t o r y d e a d l i n e f o r t h e c o m p l e t i o n o f t h e r e s o l u t i o n p r o c e s s i s 3 3 0 d a y s .

103
IBC

•I n t e r i m r e s o l u t i o n p r o f e s s i o n a l - O n c e t h e a p p l i c a t i o n i s a d m i t t e d , t h e a d j u d i c a t i n g a u t h o r i t y a p p o i n t s
an interim resolution professional (IRP).

•T h e I R P t a k e s c o n t r o l o f t h e d e f a u l t e r ’ s a s s e t s , c o l l e c t s i n f o r m a t i o n a b o u t t h e c o m p a n y f r o m I n f o r m a t i o n
Utilities (repositories) and coordinates the constitution of a Committee of Creditors (CoC).

•C o m m i t t e e o f C r e d i t o r s ( C o C ) - A C o C c o m p r i s e s a l l f i n a n c i a l c r e d i t o r s o f a d e f a u l t i n g c o m p a n y a n d i s
the most important decision -making body in every CIRP.

•I t d e c i d e s w h e t h e r t h e d e f a u l t i n g c o m p a n y i s v i a b l e e n o u g h t o b e r e s t r u c t u r e d a n d g i v e n a f r e s h s t a r t , o r
liquidated.

•I n s o l v e n c y p r o f e s s i o n a l - T h e C o C a p p o i n t s a n i n s o l v e n c y p r o f e s s i o n a l ( I P ) , w h o l o o k s a f t e r t h e
operations of the company during the CIRP.

•T h e I P i n v i t e s a n d e x a m i n e s p r o p o s a l s f o r a r e s o l u t i o n p l a n f o r a c o m p a n y , w h i c h c o u l d i n c l u d e
restructuring of debt, merger or demerger of the company.

104
IBC

•R e s olu t ion p l a n - I t s u b m i t s e l i g ibl e p l a n s t o t h e C o C , w h i c h c a n a p p ro ve a p l a n i f i t r e c ei ves

66% o f t h e v o t i n g s h a r e o f c o m m i t t ee m e m b ers .

•I f t h e C o C f a i l s t o a p pr o ve a n y r e s o l u t io n p l a n , t h e c o m p an y g o e s f o r l i q u i d ati o n.

•I f a p l a n i s a p p ro ved, t h e C o C s u b m i t s i t t o t h e T r i b u n al ( b e fo re t h e m a x i m um 3 3 0 -day
d e adl i ne), w h i c h t h e n a p p ro ves t h e p l a n w h i c h t h e d e bt or i s b o u n d t o i m p l e ment .

•T h e a d j u di c ati ng a u t h o r i ty c a n a l s o r e j e ct a p l a n .

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What are the challenges for the IBC?

•L i q u i d a t i o n - A m o n g t h e 3 , 4 0 0 c a s e s a d m i t t e d u n d e r t h e I B C i n t h e l a s t 6 y e a r s , m o r e t h a n 5 0 % o f t h e c a s e s
ended in liquidation, and only 14% could find a proper resolution.

•T i m e t a k e n - T h e a v e r a g e n u m b e r o f d a y s t a k e n t o r e s o l v e c a s e s i n c r e a s e d r a p i d l y o v e r t h e p a s t f i v e y e a r s .

•I n F Y 2 2 , i t t o o k 7 7 2 d a y s t o r e s o l v e c a s e s i n v o l v i n g c o m p a n i e s t h a t o w e d m o r e t h a n R s . 1 , 0 0 0 c r o r e .

•R e a l i s a t i o n o f v a l u e - T h e g a p b e t w e e n t h e r e a l i z a b l e v a l u e s d u r i n g r e s o l u t i o n a n d l i q u i d a t i o n h a s b e e n
narrowing over the years.

•H a i r c u t - A h a i r c u t i s t h e d e b t f o r e g o n e b y t h e l e n d e r a s a s h a r e o f t h e o u t s t a n d i n g c l a i m .

•T h e P a r l i a m e n t a r y S t a n d i n g C o m m i t t e e o n F i n a n c e i n 2 0 2 1 p o i n t e d o u t t h a t , c r e d i t o r s o n a n a v e r a g e h a d t o b e a r
an 80% haircut in more than 70% of the cases.

•C o n d u c t o f t h e C o C s - T h e S t a n d i n g C o m m i t t e e s t a t e d t h a t t h e c o m m i t t e e o f c r e d i t o r s h a s s i g n i f i c a n t d i s c r e t i o n
in accepting resolution plans and appointing IPs.

•I s s u e w i t h I P s - T h e I B B I t o o k d i s c i p l i n a r y a c t i o n o n 6 1 % o f t h e 2 0 3 p r o f e s s i o n a l s i n s p e c t e d s i n c e 2 0 1 6 , a d d i n g
that there should be a single regulator for them to ensure best practices and transparency.

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