Banking and Financial Institutions
The Reserve Bank of India
The RBI was constituted under the RBI Act, 1934 and began operations on 1 April 1935; it was nationalised in 1949. It issues all currency notes except the one-rupee note (issued by the Government of India) and coins; it acts as banker to the government, banker's bank, lender of last resort, custodian of foreign exchange reserves under FEMA, and controller of credit.
Credit control
Quantitative tools: repo rate, reverse repo, bank rate, CRR, SLR and open market operations. Qualitative tools: margin requirements, moral suasion, credit rationing and direct action. Raising CRR or SLR reduces lendable funds.
Banks and specialised institutions
Commercial banks (public, private, foreign), cooperative banks, regional rural banks, payments banks and small finance banks. Specialised institutions: NABARD (1982) for agriculture and rural development, SIDBI (1990) for MSMEs, EXIM Bank (1982) for foreign trade, IFCI (1948) for industry. The SARFAESI Act, 2002 lets lenders enforce security without going to court; chronic defaults become NPAs.
Worked example
A bank receives a primary deposit of ₹1,000 and the cash reserve ratio is 4%. Reasoning: the credit multiplier is 1/CRR = 1/0.04 = 25, so total deposits can expand to ₹1,000 × 25 = ₹25,000, of which ₹24,000 is created credit. If CRR rises to 5%, the multiplier falls to 20.
Traps that cost marks
- Saying the RBI prints one-rupee notes.
- Confusing CRR (cash with RBI) with SLR (approved securities).
- Calling NABARD the regulator of commercial banks.
- Treating a high NPA ratio as a sign of good asset quality.