Professional Knowledge: Banking and Financial Sector
This section tests the operating mechanics of Indian banking: reserves and money creation, prudential norms, deposit and payment products, KYC, asset classification and priority sector obligations. Answers usually turn on a definition, a threshold or a classification.
Reserves and money supply
CRR is the share of net demand and time liabilities held as cash with RBI; SLR is held by the bank itself in cash, gold or approved securities. Both are notified by RBI from time to time (CRR 3.0% and SLR 18.0% as of late 2025 - verify the current notification before the exam).
Prudential norms
Basel III in India: minimum CRAR 9%, of which Common Equity Tier 1 is 5.5% and Tier 1 is 7%, plus a capital conservation buffer of 2.5%, giving 11.5% in practice. LCR and NSFR must each be at least 100%.
Asset classification
Overdue 1-30 days is SMA-0, 31-60 is SMA-1, 61-90 is SMA-2; beyond 90 days the account is an NPA, then sub-standard, doubtful and loss. Priority sector lending is 40% of adjusted net bank credit, with 18% for agriculture.
Worked example. A primary deposit of Rs 100 crore enters the system with CRR at 4%. The theoretical credit multiplier is 1/0.04 = 25, so total deposits can reach 100 x 25 = Rs 2,500 crore, and the banking system can create up to Rs 2,400 crore of new credit, assuming no currency leakage and no excess reserves.
Traps that cost marks
Applying CRR to total liabilities instead of net demand and time liabilities; forgetting that SLR assets sit with the bank; mixing LCR (30-day stress) with NSFR (one-year funding); and misplacing sub-standard versus doubtful in the NPA ladder.