Banking Awareness / Financial Awareness
Banking Awareness / Financial Awareness
This section checks the regulatory skeleton of Indian banking: the RBI Act, 1934 and Banking Regulation Act, 1949, monetary policy tools, the structure of commercial and cooperative banking, priority sector lending, asset classification, deposit insurance and payment systems.
Core rules
- Monetary policy: the MPC has six members (three from RBI, three nominated by the Government), meets at least four times a year, and targets CPI inflation of 4% with a ±2% band.
- Liquidity tools: CRR and SLR are maintained on NDTL; repo is the rate at which RBI lends against securities, reverse repo absorbs liquidity, MSF is the emergency window and the bank rate is the penal rate.
- Cooperative structure: State Cooperative Bank at the apex, District Central Cooperative Banks in the middle, PACS at the base - CG Apex Bank sits at the apex level for Chhattisgarh.
- Priority sector: 40% of ANBC overall, 18% agriculture, 7.5% micro enterprises, 12% weaker sections.
- Other anchors: NABARD (1982, Sivaraman Committee), DICGC cover of ₹5 lakh per depositor per bank, NPA at 90 days overdue, SARFAESI 2002, IBC 2016, IFSC as an 11-character code.
Worked example
A bank holds net demand and time liabilities of ₹500 crore and CRR is 4%. How much must it keep with the RBI, and what happens if CRR is raised to 4.5%? Reasoning: at 4%, the balance is ₹20 crore; at 4.5%, it is ₹22.5 crore. The extra ₹2.5 crore is impounded, reducing lendable resources and tightening liquidity - the intended effect of a CRR hike.
Traps
- Reversing repo and reverse repo direction.
- Applying CRR to total deposits instead of NDTL.
- Confusing bank rate with repo rate.
- Mixing PSL sub-targets (18% agriculture vs 12% weaker sections).