Banking Flashcards
History of Banking In India
1770 :- Bank of Hindustan was established.
○ 1786 : “General Bank of India” was established.
○ 1809 : Bank of Bengal by East India Company.
○ 1840 : Bank of Bombay by East India Company.
○ 1843 : Bank of Madras by East India Company.
: These three banks were known as the Presidency
Bank.
○ 1865 : Allahabad bank was established.
: Oldest existing Public Sector Bank.
○ 1894 : Punjab National Bank was established.
: It was the first Indian bank to have been started
solely with Indian capital investments.
○ 1935 : RBI was established.
○ 1955 : Imperial Bank was converted as state Bank of
India (SBI)
types of bank in India
Schedule Commercial Bank :- Bank of India, Andhra Bank, Allahabad Bank
Private bank :- ICICI bank, HDFC banks
Public Bank :- SBI, PNB
Foreign Bank :- Deutsche Bank
Regional Rural Bank
what are schedule Commercial Bank
To simplify, the scheduled commercial banks are those banks which carry out the normal business of banking such as accepting deposits, giving out loans and other banking services.
All these banks have been included in the 2nd schedule of RBI Act 1934.
Time to time some banks are included and some are removed. For example, six banks were removed from the 2nd schedule because of
merger with other banks.
They are. namely, Syndicate Bank, Oriental Bank of Commerce, United Bank of India, Andhra Bank, Corporation Bank, and Allahabad Bank
What are Regional Rural bank
The Indian Government set up RRB on 2nd October 1975.
These banks grant credit to the weaker section of rural areas mainly small and marginal farmers, small entrepreneurs, agriculture labourers .
These banks are sponsored by the central
government, state governments and a sponsor
central bank collectively.
Sharing In RRB
Central government holds 50% share
State governments holds 15% share
Sponsor Bank holds 35% share
What is Cooperative societies?
Sub Group of Co-operative societies
It is an autonomous association of people bound together to fulfill common social, cultural and economical needs.
It is said that the system of cooperation is as old as human society.
These groups are sub-divided into two sub-groups
[a] Agricultural societies. :- Mostly found in rural areas.
[b] Non-Agricultural societies :- Mostly found in urban Areas.
:- Societies based on cottage industry are also found in rural areas.
Nationalization of Banks
After independence, all the major banks of India were under private ownership which was a cause of concern as the people belonging to rural areas were still dependent on unauthorized money lenders for financial assistance which led to their exploitation even after independence.
In Order to get rid of the problem of non-availability of credit for poor rural sections from the organized sector, the banks were nationalized under the Banking Regulation Act, 1949.
Also the Reserve Bank of India was nationalized in 1949.
After the formation of the State Bank of India in 1955, several banks were nationalized in the time period 1969-1991.
14 Banks nationalized in 1969
In 1980, another 6 banks were nationalized
When was SBI established and which parities are include in this establishment
How SBI is governed?
Is SBI a nationalized Bank
In 1955, the Government of India and Reserve Bank of India jointly established the State Bank Of India i.e. they both have joint ownership of SBI.
In 2007, Reserve Bank’s share of SBI was transferred to the government of India.
SBI is governed by a board of directors headed by a chairman. The chairman and managing directors of the bank are appointed by the government.
It is evident that the SBI works under the Government of India, but it is also a fact that SBI is not called a nationalized bank.
What is RBI
When was RBI Established
Who Governs RBI
The Reserve Bank of India is the apex bank of India which regulates and controls all the monetary policies of India.
Hence, it is called the “Monetary Authority of India’’.
RBI was established in April, 1935.
The affairs of RBI are governed by a central board of directors, which are fourteen in number, including the governor and four
deputy governors.
Functions of RBI
➔ Monetary Management Authority
➔ Regulation and Supervision of the Banking and Non-Banking Financial Institutions.
➔ Regulation of Foreign Exchange Market, Government Securities Market and Money Market.
➔ Management of Foreign Exchange Reserves.
➔ Current Account and Capital Account Management.
➔ Banker to Central and State governments
➔ Debt Manager of Central and State Governments
➔ Banker to Banks
➔ Issuer of Currency
➔ Oversight of Payment and Settlement Systems
What is Money Supply
Main Elements of the Money Supply
How Money Supply measured measured in INDIA ?
The meaning of money supply is related to the total amount of currency, which is kept by people in various forms in the economy.
● The main elements of the money supply are the currency kept by people and the demand deposits made by commercial banks.
● In India, the demand for money supply is generally measured as M1, M2, M3, M4.
● Among all the concepts of money supply, M1 and M2 is the narrowest and most important measure of money supply.
● M3 and M4 is a broad measure of money supply.
● M1 is the most liquid and M4 is the least liquid.”
Measurement level of Money supply and their Description
M1 :- Currency with the public + Demand deposits with the banking system + Other deposits with the RBI
Highest Liquidity.
M2:- M1+ Post office savings deposits
Intermediate Liquidity
M3 :- M1+ Time Deposit with the Banking
System
Liquidity is Lower than M1 and M2
M4:- M3+ All deposits with the post office
(except National Savings Certificates)
Lowest Liquidity
Type Of Diposit
Saving deposits
reinvestment deposits
fixed deposits
recurring deposits
What Are saving Deposits
A basic account used for daily transactions.
Money deposited in a savings bank account earns interest.
These accounts typically come with withdrawal restrictions but offer easy accessibility.
What is reinvestment Deposits
A type of fixed deposit where the interest earned is reinvested back into the deposit instead of being regularly paid out.
The interest is compounded quarterly and is paid along with the principal amount at the time of maturity
What is Fixed Deposits
A financial instrument provided by banks that offers a higher rate of interest than a regular savings account.
The money is deposited for a fixed period, and
withdrawal before maturity can result in penalties.
What is Recurring Deposits
A type of term deposit offered by banks in which a fixed amount is deposited at regular intervals on a monthly basis.
This is suitable for individuals who have a regular income and can make consistent deposits each month
Types of money
Credit Money :-
A currency whose acceptance or not as a form of payment depends entirely on the will of the payee. For example hundi, promissory note, bill of exchange etc.
Fiat Money:-
This is the type of money that we’re most familiar with today.
It has no intrinsic value; its value comes from the government declaring it as legal tender, meaning it must be accepted as a form of payment within a country.
currency notes and coins.
Metallic Money :-
A type of commodity money that specifically
refers to coins made from precious metals like gold and silver
Reserve Money :-
Currency in circulation + Bank deposits with RBI + Other deposits with RBI
Token money :-
Money whose face value is greater than its cost of production, like most modern coins.
what is monetary policy
Monetary policy refers to the credit/money control measures adopted by the central bank of a country.
In the case of the Indian economy, the RBI is the sole monetary authority which decides the supply of money in the economy
objective of monetary Policy
The main objective of monetary policy is to maintain price stability while keeping in mind the objective of growth as price stability is a necessary precondition for sustainable
economic growth.
In India, the RBI plays an important role in controlling inflation through the consultation process regarding inflation targeting.
The current inflation-targeting framework in India is flexible.
The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act, 2016, to provide for a statutory and institutionalized framework for a Monetary Policy Committee,
for maintaining price stability, while keeping in mind the objective of growth.
The Monetary Policy Committee is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
The Government of India, in consultation with RBI, notified the ‘Inflation Target’ in the Gazette of India dated 5 August 2016 for the period beginning from the date of publication of the
notification and ending on March 31, 2021, as 4%.
At the same time, lower and upper tolerance levels were notified to be 2% and 6% respectively.
Monetary policy committee
Established in the year 2016, under section 45ZB of the RBI Act, 1934.
It is a six member body which has to hold at least 4 meetings
in a year.
Three of these members are from RBI and the other three members are appointed by the Central Government.
It is headed by the RBI Governor.
The central government set up this committee to determine the policy interest rate needed to achieve the inflation target.
what are the Instruments of monetary policy
The instruments of monetary policy are of two types:
- Quantitative, general or indirect (CRR, SLR, Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate)
- Qualitative, selective or direct (change in the margin money, direct action, moral suasion)
What is Repo Rate
The repo rate is the interest rate at which a country’s central bank loans money to commercial banks.
The Reserve Bank of India (India’s central bank) employs repo rates to control liquidity in the economy.
The Repo rate is connected to the repurchase option’ or repurchase agreement’ in banking.
The Reserve Bank of India (RBI) increased the repo rate by 35 basis points to 6.25% on December 7, 2022, for the fifth consecutive time.
What is Reverse Repo Rate
Reverse Repo Rate is defined as the rate at which the Reserve Bank of India (RBI) borrows money from banks for the short term.
● It is an important monetary policy tool employed by the RBI to maintain liquidity and check inflation in the economy.
● The Reverse Repo Rate helps the RBI get money from the banks when it needs.
● In return, the RBI offers attractive interest rates to them.
● The Reverse Repo Rate is decided by the Monetary Policy Committee (MPC), headed by the RBI Governor
What is Marginal Standing Facility
The rate at which scheduled commercial banks decide to exchange their SLR with RBI to meet their very short term liquidity requirement is called Marginal Standing Facility.
● The RBI first mentioned the MSF in the annual monetary policy review in the financial year 2011-12.
● It was fully implemented on 9 May 2011.
● In this, all scheduled commercial banks can take loans up to 1% of their total deposits for one night
What is Bank Rate Policy
The rate at which RBI provides long term loans to commercial banks is called bank rate.
➢ Also known as the discount rate, bank rates are interest charged by the RBI for providing funds and loans to the banking system.
➢ An increase in bank rate increases the cost of borrowing by commercial banks which results in the reduction in credit volume to the banks and hence the supply of money declines.
➢ An increase in the bank rate is the symbol of the tightening of the RBI monetary policy.
What are Open market Operations
An open market operation is an instrument which involves buying/selling of securities like government bonds from or to the public and banks.
The RBI sells government securities to control the flow of credit and buys government securities to increase credit flow
What is Cash Reserve Ratio (CRR)
Cash Reserve Ratio is a specified amount of bank deposits which banks are required to keep with the RBI in the form of reserves or balances.
The higher the CRR with the RBI, the lower will be the liquidity in the system and vice versa
What is Statutory Liquidity Ratio (SLR)
All financial institutions have to maintain a certain quantity of liquid assets with themselves at any point in time of their total time and demand liabilities. This is known as the Statutory Liquidity Ratio.
The assets are kept in non-cash forms such as precious metals, bonds, etc
What is credit ceiling ?
With this instrument, RBI issues prior information or direction that loans to the commercial bank will be given up to a certain limit.
In this case, a commercial bank will be tight in advancing loans to the public.
They will allocate loans to limited sectors.
A few examples of credit ceiling are agriculture sector advances and priority sector lending.
What is Moral Suasion
Under this method RBI urges commercial banks to help in controlling the supply of money in the economy.
What is Demonetization
The act of stripping a currency unit of its status as a legal tender.
Demonetisation is necessary whenever there is a change of national currency.
The old unit of currency must be retired and replaced with a new currency unit.
Such a step is especially taken to curb the menace of counterfeiting, black money and money laundering.
A recent example is demonetisation of 500 and 1000 denomination currency units in India.
Another example of demonetisation is when the European Monetary Union nations decide to adopt Euro as their currency
History of Demonetization in India
For the first time in January 1946, ‘1,000’ and ‘10,000’ banknotes were demonetised.
These two denominations were reintroduced in 1954 along with currency notes of ‘5,000’.
But all these three denominations were again demonetised in January 1978 by the Morarji Desai government.
The RBI more recently in 2014 had demonetised all bank notes printed before 2005.
On 8 November 2016, the Prime Minister announced that Rs.500 and Rs.1000 denomination notes will become invalid.
Indian Post payments Banks
➔ To connect the poor with the banking system, ‘India Post Payments Bank’ was started on 1 September 2018.
➔ This bank will be formed as a public company under the Department of Posts
➔ The government of India will have 100 percent stake in this bank.
➔ Through this payment bank, except loan and credit card, all banking related work like; You can deposit money in the bank, send money, receive money sent by someone else and you can also send money to a relative.
What is Non Banking Financial company
● There are financial institutions in India which are not banks but which accept deposits and provide credit facilities like banks are called Non-Banking Financial Companies (NBFCs).
● A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956.
● It acquires shares /stocks /bonds /debentures /securities issued by the government or local authority.
● These companies do investment business, insurance business, chit fund, nidhi, merchant banking, stock broking, alternative investment etc.
● NBFCs cannot issue cheques, so they are not part of the payment and settlement system.
● NBFCs are regulated by SEBI
