Banking and Financial Markets

Banking and Financial Markets

Overview

Banking and Financial Markets form a crucial component of the Indian Economy section in TNPSC Group II/IIA exams. Questions typically test your understanding of RBI's functions, banking structure, regulatory bodies like SEBI, and government schemes for financial inclusion. This topic connects directly to current affairs, as monetary policy decisions, bank mergers, and new financial inclusion initiatives regularly appear in newspapers.

For TNPSC, focus on institutional roles, key acts, recent reforms, and flagship schemes. Mastering this topic also helps in the Tamil Nadu Development Administration section, where state-level financial initiatives are tested.

Key Concepts

• Reserve Bank of India (RBI) is India's central bank, established in 1935 under the RBI Act 1934, headquartered in Mumbai. It is the banker to banks, banker to government, and sole authority for currency issue.
• Monetary Policy refers to RBI's management of money supply and interest rates using tools like Repo Rate, Reverse Repo Rate, CRR, and SLR to control inflation and ensure economic stability.
• Scheduled Banks are banks listed in the Second Schedule of the RBI Act, meeting criteria of paid-up capital (₹5 lakh minimum) and operating in ways not detrimental to depositors' interests.
• SEBI (Securities and Exchange Board of India) regulates securities markets, protects investor interests, and promotes market development. Established in 1988, it gained statutory powers through SEBI Act 1992.
• Financial Inclusion means ensuring access to affordable financial services (banking, credit, insurance, pension) to all sections, especially weaker and low-income groups.
• Priority Sector Lending requires banks to allocate 40% of lending to sectors like agriculture, MSMEs, education, housing, and weaker sections.
• Non-Performing Asset (NPA) is a loan where principal or interest remains unpaid for more than 90 days.
• Payment Banks can accept deposits up to ₹2 lakh and provide payment services but cannot issue loans or credit cards.

Key Facts

Important Institutions and Their Roles

Reserve Bank of India — Functions:

1. Issue of currency (sole authority for notes; coins issued by Government, distributed by RBI)
2. Banker to Government (Central and State)
3. Banker's Bank (lender of last resort)
4. Controller of credit and monetary policy
5. Foreign exchange management under FEMA 1999
6. Regulator and supervisor of banking system
7. Developmental role — promoting financial inclusion

SEBI — Functions:

1. Regulate stock exchanges (BSE, NSE)
2. Register and regulate market intermediaries (brokers, merchant bankers)
3. Prohibit fraudulent and unfair trade practices
4. Promote investor education
5. Regulate substantial acquisition of shares and takeovers

NABARD (National Bank for Agriculture and Rural Development):

• Apex institution for rural credit, established 1982
• Refinances rural lending institutions
• Promotes Self-Help Groups (SHGs) and microfinance

SIDBI (Small Industries Development Bank of India):

• Principal financial institution for MSME sector, established 1990

Financial Inclusion Programmes

Pradhan Mantri Jan Dhan Yojana (PMJDY) — 2014:

• Zero-balance accounts with RuPay debit card
• Overdraft facility up to ₹10,000
• Accident insurance cover ₹2 lakh, life cover ₹30,000
• Direct Benefit Transfer (DBT) linked

Pradhan Mantri Mudra Yojana (PMMY) — 2015:

• Loans to non-corporate, non-farm small enterprises
• Three categories: Shishu (up to ₹50,000), Kishore (₹50,000–5 lakh), Tarun (₹5–10 lakh)
• No collateral required

Atal Pension Yojana (APY) — 2015:

• Guaranteed pension for unorganised sector workers
• Entry age 18–40 years, pension from age 60
• Monthly pension ₹1,000 to ₹5,000 based on contribution

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY):

• Life insurance cover ₹2 lakh
• Annual premium ₹436 (revised)
• Age group 18–55 years

Pradhan Mantri Suraksha Bima Yojana (PMSBY):

• Accidental death and disability cover ₹2 lakh
• Annual premium ₹20
• Age group 18–70 years

Stand-Up India Scheme — 2016:

• Loans ₹10 lakh to ₹1 crore for SC/ST and women entrepreneurs
• At least one SC/ST and one woman borrower per bank branch

Worked Examples

Example 1: RBI increases Repo Rate by 0.25%. What is the likely impact?

Solution:

• When Repo Rate increases, borrowing cost for banks rises
• Banks increase lending rates for customers
• Loans become expensive, reducing borrowing and spending
• This reduces money supply in economy
• Effect: Controls inflation by reducing demand

Example 2: A bank has total deposits of ₹1,000 crore. If CRR is 4% and SLR is 18%, calculate mandatory reserves.

Solution:

• CRR amount = 4% of ₹1,000 crore = ₹40 crore (kept with RBI as cash)
• SLR amount = 18% of ₹1,000 crore = ₹180 crore (kept in government securities/gold)
• Total mandatory reserves = ₹220 crore
• Available for lending = ₹1,000 – ₹220 = ₹780 crore

Example 3: Under which MUDRA category would a loan of ₹3 lakh fall?

Solution:

• Shishu: up to ₹50,000
• Kishore: ₹50,000 to ₹5 lakh
• Tarun: ₹5 lakh to ₹10 lakh
• Answer: Kishore category

Common Mistakes

• Confusing Repo and Reverse Repo: Repo is RBI lending TO banks; Reverse Repo is RBI borrowing FROM banks. Remember: "Repo = RBI's POint of lending."
• Mixing CRR and SLR: CRR is cash kept WITH RBI (no interest); SLR is liquid assets kept BY the bank itself in government securities. Both are percentages of NDTL (Net Demand and Time Liabilities).
• Assuming RBI issues coins: RBI only issues currency notes. Coins are minted by Government of India; RBI only distributes them.
• Confusing SEBI and RBI roles: SEBI regulates securities/stock markets; RBI regulates banking sector. Stock exchanges fall under SEBI, not RBI.
• Wrong PMJDY benefits: Overdraft is ₹10,000 (not ₹5,000), and the scheme provides accident insurance of ₹2 lakh, not ₹1 lakh.

Quick Reference

• RBI: Est. 1935, nationalised 1949, HQ Mumbai — central bank functions
• SEBI: Est. 1988, statutory 1992, HQ Mumbai — securities market regulator
• Repo Rate ↑ = Inflation control; Repo Rate ↓ = Growth stimulus
• CRR: Cash with RBI; SLR: Securities with bank itself
• PMJDY: Zero-balance + RuPay + ₹2 lakh accident cover + ₹30,000 life cover
• MUDRA categories: Shishu–Kishore–Tarun (50K–5L–10L)
• Priority Sector Lending target: 40% of total lending for scheduled commercial banks