Banking and Finance बँकिंग व वित्त

Quick summary

Money is anything that is generally accepted as a medium of exchange and a measure of value. It removed the difficulties of barter and made modern trade and banking possible. This topic covers the evolution, functions and kinds of money, the measures of money supply in India, and the meaning of inflation and deflation.

Key points

• Definition: Crowther – "anything that is generally acceptable as a means of exchange and at the same time acts as a measure and store of value." Walker – "money is what money does."
• Barter system – direct exchange of goods for goods. Its problems: lack of double coincidence of wants, no common measure of value, indivisibility of goods, difficulty in storing value and in deferred payments.
• Evolution of money: commodity money → metallic money → paper money → bank (credit) money → plastic and digital money (cards, UPI, CBDC – the e-rupee).
• Primary functions: medium of exchange, measure of value (unit of account).
• Secondary functions: standard of deferred payments, store of value, transfer of value.
• Contingent functions: basis of credit, distribution of national income, equalising marginal utilities, giving liquidity, helping capital formation.
• Kinds: legal tender (limited and unlimited) and optional money; full-bodied and token money; fiat money; near money (bills, bonds, time deposits).
• In India, coins are issued by the Government of India and currency notes by the RBI (₹1 notes by the Government).
• Money supply measures (RBI): M1 = currency with the public + demand deposits with banks + other deposits with RBI; M3 (broad money) = M1 + time deposits with banks. M2 and M4 also exist; M3 is the most used measure.
• Inflation (चलनवाढ) – a continuous rise in the general price level, which reduces the value of money. Deflation – a continuous fall in prices.
• In India inflation is measured mainly by the Consumer Price Index (CPI); the RBI's target is 4% CPI inflation with a band of ±2% (check the current framework).

Important terms

• Legal tender – money that must be accepted by law in payment of debts.
• Fiat money – money declared legal by government order, not backed by gold.
• Liquidity – ease with which an asset can be turned into cash.
• Value of money – the purchasing power of money; it moves opposite to the price level.

Key facts

• Quantity theory of money (Fisher): MV = PT, where M = money supply, V = velocity of circulation, P = price level, T = volume of transactions. With V and T constant, prices change in proportion to money supply.
• Types of inflation by speed: creeping (below 3%), walking (3–7%), running (10–20%), galloping/hyper (very high). Ranges differ by author.
• Causes of inflation: demand-pull (excess demand) and cost-push (rising wages, oil prices).

5 important questions

Q1. What is barter? State two drawbacks.

Barter is the direct exchange of goods and services without money. Drawbacks: lack of double coincidence of wants and lack of a common measure of value.

Q2. Define M1 and M3.

M1 (narrow money) = currency with the public + demand deposits of banks + other deposits with RBI. M3 (broad money) = M1 + time deposits of banks.

Q3. Explain the functions of money.

Outline: primary (medium of exchange, measure of value), secondary (deferred payments, store of value, transfer of value), contingent (basis of credit, liquidity, distribution of income, capital formation); one example each.

Q4. Explain the evolution of money.

Outline stages: barter, commodity money (cattle, grains, shells), metallic money (gold and silver coins), paper money (convertible and fiat), credit/bank money (cheques), plastic money (cards), digital money (UPI, wallets, e-rupee). Reasons for each change.

Q5. What is inflation? Explain its causes and effects.

Outline: meaning; types; causes – demand-pull and cost-push; effects on producers, consumers, fixed-income groups, debtors and creditors, savings and exports; control measures – monetary (repo rate, CRR), fiscal (taxes, spending) and supply-side.

Exam tip

Start a "functions of money" answer with the famous two-line couplet: "Money is a matter of functions four – a medium, a measure, a standard, a store." It makes your answer memorable.

Quick summary

A commercial bank accepts deposits from the public and lends money for profit. Banks create credit, run the payment system and channel savings into investment. This topic covers the meaning of a bank, the primary and secondary functions of commercial banks, the types of banks in India, and the process of credit creation.

Key points

• Banking (Sec 5(b), Banking Regulation Act, 1949) – accepting deposits of money from the public for lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
• Primary functions: (a) accepting deposits – current, savings, fixed (term) and recurring; (b) lending – loans, cash credit, overdraft, discounting of bills.
• Secondary functions: (a) agency functions – collecting cheques and dividends, paying bills, buying/selling securities, acting as trustee; (b) general utility functions – lockers, drafts, letters of credit, bank guarantees, foreign exchange, credit and debit cards, net and mobile banking.
• Credit creation (पत निर्मिती) – banks lend a large part of their deposits; loans come back as new deposits, so total deposits become a multiple of the original cash deposit.
• Credit creation is limited by the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), public's cash habits, demand for loans and availability of good securities.
• Types of banks in India: Reserve Bank (central bank); scheduled commercial banks – public sector banks, private sector banks, foreign banks, Regional Rural Banks; small finance banks; payments banks; co-operative banks (urban and state/district central); development financial institutions (NABARD, SIDBI, EXIM Bank).
• Scheduled bank – a bank listed in the Second Schedule of the RBI Act, 1934.
• After the mergers of 2019–20, India has 12 public sector banks (check for later mergers); SBI is the largest bank.
• Payments banks accept deposits (subject to a per-customer limit) but cannot give loans; small finance banks serve small businesses and the unorganised sector.
• NPA (Non-performing asset) – a loan where interest or principal is overdue for more than 90 days.

Important terms

• Current account – for businessmen; any number of transactions; usually no interest.
• Overdraft – permission to withdraw more than the balance in a current account.
• Cash credit – borrowing limit against stock or other security; interest on the amount used.
• Universal banking – one bank offering banking, insurance, mutual funds and other financial services.

Key facts

• Credit multiplier = 1 ÷ required reserve ratio.
• Total deposits created = initial deposit × (1 ÷ reserve ratio).

Worked example: initial deposit ₹10,000, reserve ratio 20%.

Multiplier = 1 ÷ 0.20 = 5, so total deposits = 10,000 × 5 = ₹50,000 and total credit created = ₹40,000.

5 important questions

Q1. Define a bank as per the Banking Regulation Act, 1949.

Banking means accepting, for lending or investment, deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise (Sec 5(b)). A company doing this business is a banking company.

Q2. What is a payments bank?

A bank that can accept small deposits and provide payments and remittance services, debit cards and net banking, but cannot lend or issue credit cards. Examples: India Post Payments Bank, Airtel Payments Bank.

Q3. Explain the primary and secondary functions of commercial banks.

Outline: deposits (four types with features), loans and advances (loans, overdraft, cash credit, bill discounting), agency services, utility services; role in the economy.

Q4. Explain the process of credit creation with an example. State its limits.

Use the table above; explain how each loan returns as a deposit; multiplier formula; limits – CRR/SLR, cash drain, demand for credit, securities, RBI's monetary policy, banking habits.

Q5. Explain the structure of the Indian banking system.

Outline with a chart: RBI at the top; scheduled and non-scheduled; commercial banks (public, private, foreign, RRBs, small finance, payments) and co-operative banks; development banks. One line on each.

Exam tip

For credit creation, a 3–4 row table with the multiplier formula is enough to earn full marks; don't write all rounds.

Quick summary

The Reserve Bank of India (RBI) is India's central bank. It issues currency, regulates banks, manages foreign exchange and controls the money supply through monetary policy. This topic covers the establishment and functions of the RBI, the quantitative and qualitative instruments of credit control, and the Monetary Policy Committee with inflation targeting.

Key points

• RBI was set up on 1 April 1935 under the RBI Act, 1934 (recommended by the Hilton Young Commission) and nationalised on 1 January 1949. Head office: Mumbai.
• It is managed by a Central Board of Directors headed by the Governor.
• Functions: (1) bank of issue – sole right to issue currency notes (except ₹1); (2) banker to the government; (3) bankers' bank and lender of last resort; (4) regulator and supervisor of banks and NBFCs; (5) custodian of foreign exchange reserves and manager under FEMA, 1999; (6) controller of credit; (7) payment and settlement systems; (8) development and promotional role (financial inclusion, rural credit).
• Monetary policy (मौद्रिक धोरण) – RBI's use of money supply and interest rates to keep prices stable while supporting growth.
• Quantitative (general) instruments: repo rate, reverse repo / Standing Deposit Facility (SDF), Marginal Standing Facility (MSF), bank rate, CRR, SLR and open market operations (OMO).
• Qualitative (selective) instruments: margin requirements, credit rationing, moral suasion, direct action, consumer credit regulation, publicity.
• Monetary Policy Committee (MPC): six members – three from RBI (including the Governor, who has a casting vote) and three appointed by the Government. Created by the 2016 amendment to the RBI Act. Meets at least four times a year.
• Inflation target: CPI inflation of 4% with a tolerance band of 2% to 6%, set by the Government for five years at a time (check the current target period).
• To fight inflation RBI raises repo rate and CRR or sells securities (tight/dear money policy); to boost growth it does the opposite (easy/cheap money policy).

Important terms

• Repo rate – rate at which RBI lends short-term funds to banks against government securities.
• Standing Deposit Facility (SDF) – rate at which RBI absorbs surplus funds from banks without collateral; it replaced the fixed-rate reverse repo as the floor of the policy corridor in 2022.
• CRR (Cash Reserve Ratio) – part of a bank's net demand and time liabilities (NDTL) kept as cash with RBI; no interest is paid on it.
• SLR (Statutory Liquidity Ratio) – part of NDTL that banks must keep in liquid assets like government securities, gold and cash.
• Open market operations – sale or purchase of government securities by RBI.

Key facts

• Policy rates change at almost every MPC meeting, so "check the current year's figures" for repo, SDF, MSF, CRR and SLR before the exam.
• MSF rate = repo + 0.25%; SDF rate = repo − 0.25% (the corridor around repo).

5 important questions

Q1. What is the repo rate?

It is the rate at which the RBI lends money to commercial banks for short periods against government securities. A higher repo rate makes bank loans costlier and reduces money supply.

Q2. Distinguish between CRR and SLR.

CRR is kept as cash balance with the RBI and earns no interest. SLR is kept by the bank itself in liquid assets like government securities, gold and cash, and can earn income.

Q3. Explain the functions of the Reserve Bank of India.

Outline the eight functions above with one line each; add recent roles – digital payments (UPI with NPCI), e-rupee (CBDC), financial literacy.

Q4. Explain the quantitative and qualitative methods of credit control.

Outline: meaning of credit control; quantitative methods (bank rate, repo, SDF, MSF, CRR, SLR, OMO) with how each works; qualitative methods (margin, rationing, moral suasion, direct action, publicity); comparison.

Q5. What is monetary policy? Explain its objectives and the role of the MPC.

Outline: meaning; objectives – price stability, growth, exchange-rate stability, financial stability, employment; MPC composition and voting; inflation targeting framework; transmission to bank lending rates; limitations in India.

Exam tip

Always write the date of establishment (1 April 1935) and nationalisation (1 January 1949) in the first lines of any RBI answer.

Quick summary

Digital banking means doing banking through electronic channels – internet, mobile, ATMs and cards – without visiting a branch. India now has one of the world's largest digital payment systems, led by UPI. This topic covers the channels of e-banking, the main payment systems (NEFT, RTGS, IMPS, UPI, cards, wallets), the institutions behind them, their benefits and risks, and safety rules.

Key points

• E-banking / digital banking (डिजिटल बँकिंग) – banking services offered through electronic means, 24 × 7.
• Channels: ATM, debit and credit cards, internet banking, mobile banking apps, phone banking, POS machines, micro-ATMs and banking correspondents (business correspondents).
• NEFT (National Electronic Funds Transfer) – fund transfer in half-hourly batches; available 24 × 7 × 365 since December 2019; no minimum amount.
• RTGS (Real Time Gross Settlement) – each transaction settled individually and immediately; minimum ₹2 lakh; for large-value payments; 24 × 7 since December 2020.
• IMPS (Immediate Payment Service) – instant 24 × 7 transfer through mobile, internet or ATM; run by NPCI.
• UPI (Unified Payments Interface) – launched by NPCI in 2016; links bank accounts to a mobile app; payment using a virtual payment address (VPA, like name@bank) or QR code and a UPI PIN.
• Other systems: AEPS (Aadhaar-enabled payment system), BHIM app, RuPay card, FASTag, Bharat Bill Payment System (BBPS), NACH for recurring payments, CTS (cheque truncation system).
• NPCI (National Payments Corporation of India) – set up in 2008 by RBI and IBA under the Payment and Settlement Systems Act, 2007; runs UPI, IMPS, RuPay, NACH and others.
• Prepaid payment instruments (PPIs) – mobile wallets and gift cards.
• CBDC / e-rupee (e₹) – the digital form of the rupee issued by RBI; pilots began in 2022.
• Limits on transactions (UPI per day, wallet balance) are changed by NPCI/RBI from time to time – check the current year's figures.

Important terms

• KYC (Know Your Customer) – process to verify a customer's identity and address.
• OTP – one-time password used for secure authentication.
• Two-factor authentication – two separate proofs (e.g. card + PIN, password + OTP).
• Phishing – fake messages or websites that trick users into giving passwords or PINs.

Key facts

• Benefits: convenience, speed, low cost, transparency, less cash handling, financial inclusion, record of every transaction.
• Risks: cyber fraud, phishing, SIM-swap, data theft, technical failures, digital illiteracy.
• Safety rules: never share PIN, OTP or CVV; use official apps only; check the payee name before paying; scanning a QR code is for paying, not for receiving money; report fraud to the bank at once and on the national cyber-crime helpline 1930.

5 important questions

Q1. What is UPI?

UPI is an instant real-time payment system developed by NPCI (2016). It links one or more bank accounts to a mobile app so money can be sent using a VPA, mobile number or QR code and authorised with a UPI PIN.

Q2. Distinguish between NEFT and RTGS.

NEFT settles in half-hourly batches with no minimum amount; RTGS settles each transaction instantly and individually with a minimum of ₹2 lakh. Both are run by RBI and are available 24 × 7.

Q3. Explain the various channels of e-banking.

Outline: ATM, cards, POS, internet banking, mobile banking and UPI, phone banking, micro-ATM/business correspondents; features and uses of each.

Q4. Explain the merits and demerits of digital banking.

Merits for customers, banks and the economy (speed, 24 × 7, low cost, transparency, less black money). Demerits: cyber fraud, dependence on network, privacy concerns, exclusion of elderly and rural users. Suggestions.

Q5. Write a note on the role of NPCI in India's payment system.

Outline: formation (2008, RBI and IBA initiative, not-for-profit company), products (UPI, IMPS, RuPay, NACH, AEPS, FASTag/NETC, BHIM, BBPS), impact on financial inclusion and cashless economy, UPI's international linkages.

Exam tip

Use a comparison table (NEFT/RTGS/IMPS/UPI) in any answer on payment systems; it scores well and saves writing time.

Quick summary

The financial system is the network of institutions, markets, instruments and services that moves savings from people who have surplus money to people who need it for investment. A strong financial system helps capital formation and economic growth. This topic covers the meaning, functions and components of the Indian financial system and its regulators.

Key points

• Financial system (वित्तीय प्रणाली) – a set of institutions, markets, instruments and services that facilitate the transfer of funds between savers and investors.
• Functions: mobilising savings, allocating funds to productive uses, providing liquidity, a payment mechanism, reducing and sharing risk (insurance, derivatives), price discovery, and giving information to investors.
• Financial institutions – banking (commercial, co-operative, RRBs, small finance, payments banks) and non-banking (NBFCs, insurance companies like LIC, mutual funds, pension funds, development finance institutions like NABARD, SIDBI, EXIM Bank, NaBFID).
• Financial markets – money market (short-term funds, up to one year) and capital market (long-term funds); also forex and commodity derivatives markets.
• Financial instruments – shares, debentures and bonds, government securities, treasury bills, commercial paper, certificates of deposit, mutual fund units, insurance policies, derivatives.
• Financial services – merchant banking, leasing, hire purchase, factoring, credit rating, venture capital, depository and custodial services, stock broking, portfolio management.
• Components:
• Regulators: RBI – banks, NBFCs, money and forex markets; SEBI – securities market; IRDAI – insurance; PFRDA – pension funds (NPS); IFSCA – International Financial Services Centres (GIFT City).
• Financial Stability and Development Council (FSDC) – chaired by the Union Finance Minister; coordinates regulators.
• Organised vs unorganised sector: the unorganised sector includes moneylenders, indigenous bankers and chit funds outside regulation.
• Reforms since 1991 (Narasimham Committee 1991 and 1998): lower CRR and SLR, interest-rate deregulation, entry of private banks, prudential norms, SEBI given statutory power, screen-based trading, depositories.

Important terms

• Financial intermediary – an institution that collects savings and lends or invests them (banks, mutual funds).
• Primary security – issued directly by a borrower (shares, debentures).
• Secondary security – issued by an intermediary (bank deposit, mutual fund unit).
• Capital formation – increase in the stock of real capital (machines, buildings) of a country.

Key facts

5 important questions

Q1. What is a financial system?

It is the set of financial institutions, markets, instruments and services that brings savers and borrowers together and channels savings into productive investment.

Q2. Name the regulators of the Indian financial system.

RBI (banking, NBFCs, money market), SEBI (capital market), IRDAI (insurance), PFRDA (pension) and IFSCA (international financial services centres).

Q3. Explain the components of the Indian financial system.

Outline the four components with a chart and examples; show how they work together; mention regulators.

Q4. Explain the functions of the financial system and its role in economic development.

Outline: mobilising savings, capital formation, allocation of resources, liquidity, payment system, risk management, price discovery, supporting government borrowing, promoting entrepreneurship, financial inclusion.

Q5. Write a note on financial sector reforms in India after 1991.

Outline: background (1991 crisis); Narasimham Committee recommendations; banking reforms (CRR/SLR cut, prudential norms, private and foreign banks); capital market reforms (SEBI Act 1992, NSE, demat, T+1 settlement); insurance opened to private firms (IRDA Act 1999); recent – IBC 2016, bank mergers, digital payments.

Exam tip

Draw a tree chart of the financial system (institutions – markets – instruments – services) at the start of any long answer; it organises the answer and earns presentation marks.

Quick summary

The money market is the market for short-term funds – loans and instruments with a maturity of up to one year. Banks, financial institutions, companies and the government use it to manage their day-to-day cash needs. The RBI regulates it and uses it to transmit monetary policy. This topic covers its meaning, features, instruments, participants and its Indian structure.

Key points

• Money market (नाणेबाजार) – the market for borrowing and lending short-term funds (overnight to one year). It deals in near-money assets.
• Features: short-term, high liquidity, low risk, large transactions, mostly over the telephone or electronic platforms, no single place (not a physical market), dominated by banks and RBI.
• Call money – overnight borrowing and lending among banks; notice money – 2 to 14 days; term money – 15 days to one year.
• Treasury bills (T-bills) – short-term government securities of 91, 182 and 364 days, issued at a discount by RBI for the Government of India.
• Commercial paper (CP) – unsecured promissory note issued by companies with good credit rating; maturity 7 days to one year.
• Certificate of deposit (CD) – negotiable time deposit issued by banks (7 days to one year) and by financial institutions (1 to 3 years).
• Repo and reverse repo – short-term borrowing against securities with an agreement to repurchase.
• TREPS (Tri-party repo) – repo dealing with a third party (CCIL) handling collateral.
• Commercial bills – trade bills discounted by banks.
• Instruments:
• Participants: RBI, commercial and co-operative banks, primary dealers, financial institutions, mutual funds, insurance companies, corporates and the government.
• Indian money market: organised sector (RBI, banks, DFIs, NBFCs) and unorganised sector (moneylenders, indigenous bankers, chit funds).
• Defects (traditional): dualism (organised vs unorganised), seasonal stringency of funds, shortage of instruments, many interest rates. Reforms (Vaghul Committee, 1987; DFHI, 1988; CCIL, 2001) improved it.
• Call rate moves within the corridor of SDF and MSF rates around the repo rate.

Important terms

• Discount – the difference between face value and issue price of a T-bill or CP.
• Primary dealer – firm authorised by RBI to deal in government securities.
• Liquidity – how quickly an asset can be turned into cash without loss.
• Near money – assets that are almost as liquid as cash.

Key facts

Worked example (yield on a T-bill): a 91-day T-bill of face value ₹100 is issued at ₹98.50. Discount = ₹1.50. Annualised yield ≈ (1.50 ÷ 98.50) × (365 ÷ 91) × 100 ≈ 6.11% p.a.

5 important questions

Q1. What are treasury bills?

Short-term government securities issued by RBI on behalf of the Government of India for 91, 182 and 364 days. They are issued at a discount and repaid at face value, so the difference is the return.

Q2. Distinguish between commercial paper and certificate of deposit.

CP is an unsecured promissory note issued by rated companies to raise short-term funds. CD is a negotiable term deposit issued by banks and financial institutions. CP is a company's borrowing; CD is a bank's deposit.

Q3. Explain the instruments of the Indian money market.

Outline call/notice/term money, T-bills, CP, CD, commercial bills, repo/reverse repo and TREPS with maturity, issuer and features.

Q4. Explain the features and defects of the Indian money market.

Outline features (above), defects (dualism, lack of integration, seasonal stringency, limited instruments, uneven interest rates, absence of a developed bill market) and reforms that removed many of them.

Q5. Explain the role of RBI in the money market.

Outline: regulator, lender of last resort, liquidity adjustment facility (repo, SDF, MSF), OMO, issuer of T-bills, setting rules for CP and CD, development of institutions (DFHI, CCIL, FIMMDA), market stabilisation.

Exam tip

Learn maturity periods (T-bills 91/182/364 days; CP 7 days–1 year; CD 7 days–1 year for banks, 1–3 years for FIs) – they are favourite short questions.

Quick summary

The capital market is the market for long-term funds – shares, debentures and bonds with maturity of more than one year. It has a primary market, where new securities are issued, and a secondary market (stock exchanges), where existing securities are traded. SEBI regulates it to protect investors and develop the market. This topic covers its structure, stock exchanges, depositories, and the powers and functions of SEBI.

Key points

• Capital market (भांडवल बाजार) – the market for medium- and long-term funds for industry, trade and government.
• Primary market (new issue market) – companies raise fresh capital through IPO (first public issue), FPO (further public offer), rights issue (to existing shareholders), private placement, preferential allotment and QIP (qualified institutional placement). Methods: fixed-price issue and book building.
• ASBA (Application Supported by Blocked Amount) and UPI are used to apply; money is only blocked until allotment.
• Secondary market (stock exchange) – where existing securities are bought and sold. Main exchanges: BSE (Bombay Stock Exchange, 1875, Asia's oldest) and NSE (National Stock Exchange, set up 1992, trading from 1994). Indices: Sensex (30 shares, BSE) and Nifty 50 (NSE).
• Trading is screen-based and anonymous; settlement in India moved to T+1 (fully from January 2023); optional same-day (T+0) settlement has started for some shares.
• Depositories: NSDL (1996) and CDSL (1999) hold securities in electronic (demat) form; investors deal through depository participants (DPs).
• Intermediaries: stock brokers, merchant bankers, registrars, underwriters, credit rating agencies, mutual funds, portfolio managers, custodians.
• SEBI (Securities and Exchange Board of India) – set up on 12 April 1988; got statutory powers on 30 January 1992 under the SEBI Act, 1992. Head office: Mumbai.
• Objectives of SEBI: protect investors' interests, develop the securities market, regulate it.
• Functions (Sec 11 of SEBI Act): regulating exchanges and intermediaries, registering and regulating mutual funds and collective investment schemes, prohibiting fraudulent and unfair trade practices and insider trading, regulating takeovers, investor education, conducting inspections and audits, levying fees and penalties.
• SEBI has quasi-legislative (makes regulations), quasi-judicial (passes orders and penalties) and quasi-executive (inspects, investigates) powers. Appeals against SEBI orders go to the Securities Appellate Tribunal (SAT).
• Investor grievances are handled online through SCORES.

Important terms

• Book building – price discovery by inviting bids within a price band.
• Insider trading – dealing in securities using unpublished price-sensitive information.
• Bull / bear – a speculator expecting prices to rise / fall.
• Listing – admission of a security for trading on a stock exchange.
• Demat account – an account holding securities in electronic form.

Key facts

5 important questions

Q1. What is an IPO?

An Initial Public Offer is the first sale of shares by a company to the public, after which its shares are listed on a stock exchange.

Q2. Distinguish between the primary and the secondary market.

The primary market deals in new securities and the money goes to the issuing company. The secondary market deals in existing securities and the money moves between investors. The first creates capital; the second gives liquidity.

Q3. Explain the functions and powers of SEBI.

Outline: background (1988, 1992 Act); protective functions (insider trading, fraud, investor education, disclosure norms); regulatory functions (registration of intermediaries, takeovers, mutual funds, exchanges); developmental functions (training, new products, research); powers and SAT.

Q4. Explain the functions of a stock exchange.

Outline: liquidity and marketability, continuous price evaluation, safety of transactions, capital formation, channelling savings, barometer of the economy, listing discipline, clearing and settlement (T+1).

Q5. Explain the structure of the Indian capital market and recent reforms.

Outline: primary and secondary markets; instruments; intermediaries; depositories; regulators; reforms – demat, screen trading, NSE, rolling settlement to T+1, ASBA/UPI in IPOs, SME platforms, SCORES, stricter disclosure and corporate governance norms.

Exam tip

Write SEBI's dates (12 April 1988; 30 January 1992) and the three objectives in the opening lines; then explain the functions under three heads – protective, regulatory and developmental.

Quick summary

Financial inclusion means giving every person and small business access to useful and affordable financial services – a bank account, credit, insurance, pension and digital payments – delivered responsibly. India has made big progress through Jan Dhan accounts, Aadhaar, mobile phones (the JAM trinity) and UPI. This topic covers its meaning, need, major schemes and recent trends in banking and finance.

Key points

• Financial inclusion (वित्तीय समावेशन) – the process of ensuring access to appropriate financial products and services needed by all sections of society, especially vulnerable and low-income groups, at an affordable cost in a fair and transparent manner (Rangarajan Committee, 2008, adapted).
• Need: to free the poor from moneylenders, encourage savings, give credit for self-employment, deliver government benefits directly (DBT), reduce poverty and support growth.
• Pradhan Mantri Jan Dhan Yojana (PMJDY) – launched 28 August 2014; zero-balance accounts, RuPay debit card, accident insurance cover and overdraft facility.
• JAM trinity – Jan Dhan accounts, Aadhaar and Mobile – used for Direct Benefit Transfer (DBT).
• Social security schemes (2015): PMJJBY (life insurance), PMSBY (accident insurance), Atal Pension Yojana (pension for the unorganised sector). Premiums and covers are revised from time to time – check the current year's figures.
• Credit schemes: PM MUDRA Yojana (2015) – loans for micro enterprises in categories Shishu, Kishore, Tarun (and Tarun Plus); Stand-Up India (2016) – loans for SC/ST and women entrepreneurs; PM SVANidhi (2020) – for street vendors; Kisan Credit Card for farmers.
• Delivery channels: bank branches, business correspondents (bank mitras), ATMs and micro-ATMs, India Post Payments Bank, small finance banks, payments banks, self-help groups (SHG–bank linkage by NABARD).
• RBI's Financial Inclusion Index (FI-Index) – launched in 2021 with three parameters: access, usage and quality; scale 0 to 100.
• National Strategy for Financial Inclusion (2019–24) by RBI, along with financial literacy centres and the annual Financial Literacy Week.
• Recent trends in banking: UPI and digital payments, mergers of public sector banks, Insolvency and Bankruptcy Code 2016 for bad loans, fall in NPAs, Account Aggregator framework, e-rupee (CBDC), fintech and neo-banks, co-lending by banks and NBFCs, green finance, and stronger cyber-security rules.

Important terms

• Financial literacy – knowledge and skills to make sound money decisions.
• Direct Benefit Transfer (DBT) – subsidies paid straight into beneficiaries' bank accounts.
• Business correspondent – an agent who provides banking services in villages on behalf of a bank.
• Microfinance – small loans and services to low-income people, often through SHGs and MFIs.

Key facts

5 important questions

Q1. What is financial inclusion?

It is the delivery of banking and financial services – savings, credit, insurance, pension and payments – at affordable cost to disadvantaged and low-income groups.

Q2. State the main features of PMJDY.

Zero-balance savings account, RuPay debit card with accident insurance cover, overdraft facility for eligible account holders, and use of the account for DBT payments. Launched on 28 August 2014.

Q3. Explain the need and importance of financial inclusion in India.

Outline: rural population, dependence on moneylenders, savings mobilisation, credit for livelihood, DBT and reduced leakages, women's empowerment, poverty reduction, formal economy, inclusive growth.

Q4. Explain the major government schemes for financial inclusion.

Outline the schemes in the table above with features; add KCC, PM SVANidhi, SHG–bank linkage, India Post Payments Bank.

Q5. Explain the recent trends in the Indian banking sector.

Outline: digital banking and UPI, bank mergers, IBC and NPA resolution, payments and small finance banks, Account Aggregator, CBDC, fintech partnerships, financial inclusion, ESG/green finance, cyber-security challenges.

Exam tip

Use the year table of schemes in short notes, and end long answers with two problems that still remain – inactive accounts and low financial literacy – with suggestions.